Cut the interest rate and watch debt grow - Adam Creighton
Apart from the dubious benefits of higher house prices and more indebted households, it is hard to see what good can come from another cut in official interest rates today. Traders are expecting the Reserve Bank board to establish a historic low of 2 per cent for the cash rate, entrenching the lowest mortgage rates for at least 50 years.
While lower domestic rates will briefly satisfy those who see economic salvation in an ever weaker currency, they will exacerbate a national debt fetish that is increasing Australia’s economic vulnerability. Central banks here and abroad have repeatedly cut official interest rates to spur business borrowing, investment and jobs growth without obvious success.
Indeed, the only horses slurping the monetary water on offer in Australia have been our already heavily indebted households. While other countries have been curbing their reliance on debt since 2011 - when the Reserve Bank started its aggressive rate-cutting strategy - Australian households have been ratcheting up theirs to the equivalent of 130 per cent of national income, the highest level in the world and rising.
Household debt is growing more than twice as fast as wages are, while the value of loans to buy second or more houses is ballooning by about 10 per cent, or $50 billion, a year.
Add in Australia’s businesses and overall private sector debt has risen to a national high of 206 per cent of national income, having steadily increased from the bottom to the top quartile of rich countries over the past 30 years, according to recent Barclays research. New house and apartment construction is going gangbusters at a pace of 230,000 dwellings a year, or more than enough to house a country whose population increases by around 400,000 a year.
House prices are still rising at double-digit annualised rates in Sydney and Melbourne, but business borrowing and investment here and worldwide despite repeated and significant cuts in interest rates are still sluggish, hobbled in part, at least, by the economic uncertainty ultra-low rates entail.
Australia cannot buck the global trend towards ever lower rates, a phenomenon whose causes and consequences are dividing the greatest economic minds of our generation.
But in the face of evidence of rapidly rising leverage and ineffectiveness at boosting jobs or real business investment, it would be better to keep a bit of its monetary powder dry in case of an actual crisis.
While falling iron ore and coal prices bode ill for our short-term national income, lowering interest rates will do nothing to offset these structural, rather than cyclic, challenges our economy faces.