RBA ‘shouldn’t just rely on low interest rates’ to assist economy

In a move that drove the Aussie dollar up past $US0.76, the US Federal Reserve chose last week to keep its funds rate on hold at 0.25 to 0.5 per cent.

AMP Capital chief economist Shane Oliver explained to Mortgage Business that it is likely that the RBA will choose to cut rates in November in an effort to bring the Aussie dollar back down.

“If we get to the November meeting and we’ve seen another low inflation reading from the September quarter inflation numbers that come out in late October, and the Aussie dollar still remains relatively high (at current levels or above), then I think that will probably trigger a rate cut in November,” he commented.

“The trouble is there’s only one thing the RBA can do and that’s change interest rates … it would be useful for the RBA to get more help from the government in terms of assisting the economy. It shouldn’t just be relying on low interest rates to do it,” he said.

Mr Oliver noted that cutting the rate to lower levels can potentially create financial instability as customers could be motivated to “take on more debt” than they otherwise would have, which can lead to the risk of defaulting on that debt when interest rates rise or property prices fall.

He highlighted that government assistance has been proven to be an effective method of boosting the economy in the past.

“It might involve ways to finance more infrastructure spending for example, and it’s been proven in NSW, Victoria and the ACT that more infrastructure spending does help growth,” he said.

“Likewise the federal government can perhaps do more in terms of economic reform to help boost the flexibility of the economy and its ability to withstand a higher Aussie dollar,” he concluded.

[Related: RBA ‘not inflation nutters’, says new governor]