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Rate hike would be a ‘major policy mistake’: AMP

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Reporter 3 minute read

AMP economist Shane Oliver has dismissed a claim from former Reserve Bank board member Warwick McKibbin, who suggested that the central bank should pre-emptively lift the cash rate.

Australian National University (ANU) professor Warwick McKibbin recently called on the Reserve Bank of Australia (RBA) to increase the official cash rate by 0.25 of a percentage point in order to prepare borrowers for global rate rises.

However, AMP economist Shane Oliver has claimed that such a move would be akin to “shooting yourself in the foot in order to practice going to [the] hospital”.

According to Mr Oliver, lower than expected economic growth trends, weakness in Australia’s housing market, tighter lending conditions and uncertainty in the global economic environment argue against a rate rise.

“Against this backdrop, raising rates just to prepare households for higher global rates would be a major policy mistake,” Mr Oliver said.

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“It would be like shooting yourself in the foot so you can practice going to [the] hospital.

“Some might argue that given high household debt, you might miss the foot and hit something more serious — but I wouldn’t go that far.”

Auswide Bank and Bank of Queensland recently lifted rates on their home loan offerings, attributing their decision to a significant increase in funding costs, particularly given the rising costs of funds from the US.

Mr Oliver, however, has urged the RBA to focus on domestic economic conditions.

“The RBA needs to set Australian interest rates for Australian conditions not on the basis of other global economies that are in different stages in the cycle — notably the US which has unemployment and underemployment of just 7.6 per cent in contrast to Australia where it’s 13.9 per cent,” Mr Oliver continued.

“Raising rates when there is still high levels of labour market underutilisation, wages growth is weak and inflation is at the low end of the inflation target would just reinforce low inflation expectations — causing businesses and households to question whether the RBA really wants to get inflation and wage growth back up to be more consistent with the inflation target and run the risk of a slide into deflation next time there is an economic slowdown.”

Further, Mr Oliver noted that Australian borrowers have already been warned about a looming rate rise, hence would be prepared for such a move.

“The RBA has already provided numerous warnings that sooner or later rates will go up, effectively helping to prepare households that such a move may come, and in recent times, banks have raised some mortgage rates, albeit only slightly,” Mr Oliver added.

“Last year’s bank rate rises were in response to regulatory pressure and recently they have been in response to higher short-term money market funding costs as the gap between bank bill rates and the expected RBA cash rate has blown out by around 0.35 [of a percentage point] relative to normal levels.

“This has further reminded households of the risk of higher interest rates.”

Moreover, Mr Oliver reiterated AMP’s view that the cash rate would remain on hold until 2020.

“Our assessment is that this is just what it will do and that rates will be on hold for a long while yet. In the meantime, the debate about rates will no doubt rage on,” the economist said.

The RBA will meet on Tuesday (3 July) to decide the official cash rate for the month. The majority of analysts and industry representatives expect that the rate will remain at its record low level of 1.5 per cent for yet another month.

[Related: Cash rate stagnation continues]

Rate hike would be a ‘major policy mistake’: AMP
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