Australia’s longest-serving Federal Treasurer has warned that extremely low interest rates may be the catalyst for the next financial crisis.
Reserve Bank of Australia governor Philip Lowe has repeatedly indicated that the national interest rate of 0.1 per cent will remain at its current low levels until 2024.
But former Federal Treasurer and Future Fund chairman Peter Costello said emergency economic stimulus measures shouldn’t be in place for the long term.
“I understand what’s going on, that we’re trying to reassure everybody that monetary policy and fiscal policy will be supportive for as long as it is needed. But I think the critical thing at the moment for central banks and governments is to think of the exit strategy,” Costello in Sydney today at the AFR Business Summit.
“Because if we don’t have an exit strategy, we will be building up the next financial crisis, and you know what the next financial crisis will be? It will be asset bubbles.”
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The near-zero interest rates currently in place were “for emergencies”, he said, comparing the low rates to morphine being delivered to a patient in great pain.
“But it doesn’t mean the patient should be on morphine once they recover,” Costello said.
Central banks around the world brought down interest rates when the COVID-19 pandemic hit in order to keep economies going and encourage spending.
Low interest rates allow individuals and businesses to borrow money and pay less interest, which encourages bigger purchases.
Asset bubbles are created when an asset, such as property, stocks or gold, rises dramatically in price in a short amount of time that isn’t proportionate to its value. Low interest can lead to asset bubbles because money becomes cheap to borrow and investors pour money into higher-risk asset classes, leading to a spike in asset prices. Asset bubbles can then lead to recessions when the flow of new money stops or slows significantly and prices drop, causing some to lose large sums of money.
In its monthly statement issued last week, the RBA board said it would not be lifting interest rates for a long time.
“The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets. Together, monetary and fiscal policy are supporting the recovery in aggregate demand and the pick-up in employment,” the said.
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.
“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”