When our economy is sluggish and it needs a kick along the best way to initiate activity is to cut interest rates right? Wrong, according to one of Australia’s leading economists.
Saul Eslake is a high profile economist from Bank of America Merril Lynch who frequently appears in the media, and he says that lowering interest rates might achieve nothing other than to inflate the price of property and lift risky levels of debt.
After earlier predicting a continued period of steady rates for 2015, Mr Eslake is now tipping a second 25 basis point cut in the next few months.
Mr Eslake predicted in The Age a rise in the median national house price from $469,999 to $497,000 by the end of the year.
Mr Eslake said slow gains in household income growth meant debt would be driven up to pre-GFC levels.
“Indeed, on the majority of measures and metrics Australia’s household debt level is already high compared to our own history and other developed nations,” he said.
“The household sector holds more debt than the non-financial business sector and all levels of government combined.”
“And as a proportion of GDP it holds more than any other comparable developed economy.”
Mr Eslake says the RBA is in a difficult position.
“The federal government has been frustrated in getting its policy reform agenda enacted and continues along a path of fiscal conservatism in a time of below trend growth,” he told The Age.
“State governments are also becoming more conservative, and are increasingly less able and, in some cases, less willing to spend and/or invest in infrastructure projects,” he said.
Mr Eslake said consumer confidence is staying low and not getting a boost from the lower interest rates and while unemployment remains a factor household spending is likely to remain weak.
“Households with a mortgage continue to pay the same mortgage amount each month with only the principal and interest proportions altered,” he said.
“In this way, lower interest rates have largely been cashflow neutral.”