4 April 2020
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Or does he have a point?

Top economist says raise interest rates now! Is he mad?

Peter Switzer
21 June 2018

One thing that happens when you call yourself an economist is that you generally think you know more about the economy than anyone else. And sometimes being an aged, market player can also qualify you as a guru, who has to be listened to when you decide it’s time for a warning.

To compound this hubris is the fact that the media loves to play up warnings big time and seldom embraces positive predictions from experts. I’m not saying that more optimistic observations from influential types are ignored but they’re often buried at the end of a negative, scary story, which has been headlined with something akin to Nightmare on Elm Street.

So we look at this effort in the AFR starring respected ANU economist, Warwick McKibbin, who I always see as a good catch for my TV show, who thinks the Reserve Bank has to raise interest rates ASAP.

He thinks the RBA hanging on to the quarter-century old 2-3% inflation target as a guide to when to raise rates could leave home loan borrowers with a big problem when international rate rises force the central bank and our local lenders to follow suit.

Warwick’s warning doesn’t seem so crazy when you recall that job creation over the past year and a half has been at historically high levels and economic growth for the year to March was 3.1% — much higher than most economists expected.

Usually when an economy spits out good growth and lots of jobs, inflation starts to pick up and central banks start raising rates to make sure price rises don't become silly. That’s the RBA’s job: to make sure inflation doesn’t threaten economic stability — growth and jobs.

So Warwick might have a case, however, he’s in a very slim minority. Most economists think the next rate rise will be in 2019 and there are more who think it will be 2020!

I believe if economic growth continues to beat 3% and job creation winds the unemployment rate down over this year, then the RBA could move in 2019. Like the RBA’s boss, Phil Lowe, I want to see the economy definitely on a 3% plus growth trajectory before rates rise. If that happens, inflation will start to rise and it will be time for rates to rise too.

If Phil took Warwick’s advice now, it could kill off the probable economic recovery we’re seeing now, especially when the media gets hold of it, with their “there will be blood” headlines! (Woops, I think we used one of those last week! Bloody media!)

Rate rises too soon and too fast could seriously worsen the housing market slow down and create a pricked-bubble-like situation. But Warwick thinks that isn’t a valid reason for delaying a rise!

This is what he told the AFR’s Jacob Greber:

“If the argument is 'we can't raise rates because if we do, we could make the housing market a lot worse', or prick some other asset bubble and cause a shock – if that's the problem – it's better to raise rates now than wait six months,” he said.

I have to say, it looks pretty wise to me. I’d argue that the stronger the economy, the stronger the job market, the stronger wage rises will be and the stronger households will be to cope with rate rises. Right now, consumer confidence has just turned positive but it’s not gangbusters stuff, so why unsettle them with a pre-emptive rate rise?

Right now, the money market thinks the chance of a rate rise by March next year is 8% but a month ago it was 52%!

Warwick says if we keep our interest rates too low compared to the US and Europe, our dollar will collapse, which will create huge inflation and reduced foreign investment. It could sow the seeds of a recession. All this speculation, however, hinges on timing and Australia’s future economic growth.

Now Warwick is a hot shot economist and holds a position at the prestigious Brookings Institution in Washington DC. And he thinks the 2-3% inflation target used by the RBA is out-of-date and should be replaced by how fast our total money income is increasing. Economists call this nominal income growth, which is running around 6-7%, which he thinks short-term interest rates should be close to. But right now, here, they’re a lot lower!

One day Warwick’s argument could get me in but not now. I’ve always been in ‘the rate rise sooner rather than later’ group because I always thought the economy was growing faster than most, and the last 3.1% number for growth was a plus for my economic crystal ball.

But I know with economic forecasting, you’re a rooster one day and a feather duster the next, so I want to see one more growth number over 3%. And that should coincide with slightly higher inflation and wages growth.

That’s when I’ll jump on board with Wazza. By the way, I’d also like the next federal election out of the way because Labor’s controversial policies on capital gains tax, negative gearing and other tax policies could easily put business and wealth-building investments on hold.

We don’t need any economic disturbances right now with the economy on the improve. On the same point, Warwick’s pre-emptive rate rise could also be a disturbance our economy, our businesses and consumers don't really need here and now.

In fact, a rate rise right now would border on madness.



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