A senior economist has discussed the potential ramifications of too low an official cash rate, and predicted that if the RBA cuts the rate in November, “it would probably be it”.
Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver pointed to ongoing debate among industry pundits about the ramifications of lowering the ‘official cost of borrowing’ to lower levels.
“You can create financial instability because people will be motivated to take on more debt than they otherwise should have, and there is a risk that at some point they might default on that debt, when interest rates start rising or property prices take a tumble,” Mr Oliver explained.
“That’s the main risk associated with ever-lower levels for interest rates for Australia, and that’s also a source of debate in the US, Japan, Europe and other parts of the world.”
Although he predicted that the RBA would likely cut the official cash rate to 1.25 per cent next month, when it reviews its economic forecast after the release of September quarter inflation data, Mr Oliver highlighted that it would be “a close call”.
“If you look at growth in Australia it’s actually been quite reasonable,” he noted. “We’ll get to the point where the RBA will conclude that they’ve already done enough to help push inflation back up and push the currency down, so I actually think a cut in November or a cut to 1.25 per cent would probably be it.”
“If growth in Australia was a lot weaker, then I suppose there would be an argument to keep going, but it’s not the case — growth in Australia is actually pretty strong,” he concluded.
Mr Oliver emphasised that Australia is among the strongest countries in the world compared to other developed countries.
“There aren’t many countries growing at 3.3 per cent,” he said. “Certainly not the US, Europe or Japan, so our situation is radically different to those countries — we don’t need to do zero or negative interest rates.”