Former Reserve Bank governor says interest rate cuts have ‘done everything they can do’ | Australia news

Former Reserve Bank governor Ian Macfarlane has weighed into the debate over interest rates, believing any further cuts will have very little power to do anything useful.

The central bank cut the official cash rate to a record low of just 0.75% this week, the third reduction in a matter of months.

“Too much faith is being placed in the expectation that monetary policy can do things that it can’t do,” Macfarlane told News Corp on Saturday. “It’s done everything it can do. Once interest rates are negligible, further cuts would seem to have very little power to do anything useful.”

Even so, financial markets are predicting a further cut in the cash rate to 0.50% by the end of the year and possibly a further move to 0.25% in early 2020.

Macfarlane, who headed the central bank for 10 years until 2006, believes the current era is the “most perplexing and difficult for monetary policy ever”.

“At least during the GFC you knew what had to be done,” he said.

The federal government has so far shunned the idea of undertaking any further stimulatory measures to lift economic growth. The treasurer, Josh Frydenberg, has pointed to the government’s existing infrastructure package and income tax cuts that will show up in next quarter’s growth figures to justify resisting current RBA governor Philip Lowe’s calls for further fiscal stimulus.

Despite the income tax cuts that began on 1 July and interest rate cuts in June and July, retail spending for August in data released on Friday showed only a modest 0.4% increase.

Australia’s economy grew by 1.4% in the year to June – the lowest recorded annual rate since 2009 – which Lowe noted was “weaker than expected”.

With the unemployment rate rising from 5.0% at the start of the year to 5.3% in August and an inflation rate of 1.6%, experts expect rates to fall at least as low as 0.5% to further stimulate the economy after two successive cuts in June and July.

Addressing the party faithful in Tasmania on Saturday, the prime minister, Scott Morrison, admitted he wanted to see a stronger economy at a time when there were many pressures globally.

“I’m pleased to say though, that when you compare where Australia is to the other advanced economies of the world, we are punching well well well above our weight, and it’s not by accident,” Morrison told the Liberal State Council in Devonport. “It’s not luck, it’s a result of good stewardship, planning, management and getting the right settings in place.”

But the opposition leader, Anthony Albanese, said the Reserve Bank cut the cash rate below 1% because it thinks that economic growth is not good enough.

“They want the government to step up and bring forward infrastructure investment,” he told reporters in Sydney.

He said consumer demand was low, economic growth forecasts had been cut, productivity was going backwards and wages were not keeping up with the cost of living.

Morrison said the first call on the federal budget was supporting rural and regional communities through the drought.

“That is the most important call on our budget at the moment,” he said.

However, Albanese said the “alleged” $7bn set aside for drought assistance was “simply a mirage” – $5bn of which was just shifting money from one fund to another, rather than being new money. Even then, he said the funds do not flow until July 2020.

“The government needs to do more to assist those farmers who are doing it tough and the communities that are doing it tough in this drought,” the Labor leader said.

Source link Finance News Australia

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