Australia will need to do more than simply cut interest rates in order to boost economic growth — but we are not going to like it, said former federal treasurer Peter Costello.
Speaking in Sydney just a day after the Reserve Bank slashed the national interest rate to a new record-low of 0.5 per cent, Costello said the strategy of cutting rates was an ‘easy lever’ that was quickly becoming less potent.
“Moving the rate by 25 [basis points], even 50 bps … You’re running out of efficacy,” he said.
When looking at boosting economic growth, manipulating monetary policy – as opposed to adjusting fiscal policy, which requires legislation that requires parliamentary approval – is the “easiest lever to pull”, he said.
“In a crisis everyone relies on the easiest arm of policy which is monetary. We've been relying on it since 2008 – since the global financial crisis.”
But with the cash rate now at 0.5 per cent, a new low never before seen in Australia, Costello pointed out that monetary policy has little room left to move.
Sooner or later, the government will have no choice but to address “unsexy” underlying issues weighing on the broader economy by boosting productivity and removing “blockages and stoppages”, he said.
“It’s looking right across our economy: an efficient tax system which rewards initiative, good transport links which make it easier to distribute at lower costs good and services, good education so people are able to realise their full potential, less intrusion in regulation."
According to the former treasurer, we haven’t dealt with these issues because they are more difficult to tackle than changing the cash rate, which is “done overnight”.
“All of those things are pretty hard, and they are unsexy. And that's why it's much easier just to get your central bank to make an announcement on the cash rate,” he said.
“But the trouble is after your central bank has done all their cash cuts … [we’ve] still got all of these hard issues to go back to.”
This problem isn’t Australia-specific, but has been a feature of other Western countries since 2008, he added.
“The easy stuff we’ve all done, but there's a lot of the harder stuff that’s still there.”
Costello made similar comments at Yahoo Finance’s inaugural All Markets Summit in September last year.
“These are abnormal times,” he said. “What will a rate cut do for the economy? In my view, not much.”
“It’s also what we call the law of diminishing returns. Every rate cut brings a little less of a return than the one before.”
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