Two central banking experts have backed calls for the Reserve Bank to begin raising its official cash rate as the national economy strengthens.
The experts are Monash University economist Mark Crosby and Sydney University’s James Morley, who say rates can start going up now that there’s record employment growth, non-farm economic expansion at 3.6 per cent, a state-based infrastructure spending boom and that the federal budget is returning to surplus.
The economists are backing former RBA board member Warwick McKibbin, who this week warned that the central bank is missing a chance to restore its monetary policy firepower as global central banks begin unwinding their crisis-era settings. They say it’s increasingly time for a more ‘normal’ cash rate.
The calls contradict the opinion of most analysts and the RBA who still say inflation and wage growth are too low to start lifting interest rates.
“There is plenty going on to support the economy, and I can’t see that going away,” Mr Crosby told Australian Financial Review.
Mr Crosby says it is time for the RBA to reverse what he calls its excessive rate cuts in 2016 when the central bank cut rates from 2 to 1.5 per cent. He says the RBA should now be more proactive.
“They keep delaying and finding reasons not to move up,” he said.
“Whereas my view is it’s safe enough to do so, this is just an unhealthy level of interest rates at the moment.”
Sydney University’s Professor Morley says the record-low interest rates have been successful in helping the economy transition out of the mining boom but they need to focus now on the risks of overdoing it.
“Returning rates to neutral if the economy is close to its potential level, for which there is lots of evidence, like the labour market, then returning rates to neutral within the next year seems like a sensible strategy,” he told AFR.
Both economists agree that recent US Fed rate hikes have put more pressure on Australia’s RBA to avoid falling behind the curve.
“With debt levels where they are, house prices where they are, and an economy as robust as it is, now is the time to raise rates,” Mr Crosby said.