Why We Can’t Just Keep Lowering Our Interest Rates

With the RBA’s recent cut to already record-low interest rates, it’s left many experts warning that the downward slope is indeed a slippery one.

Martin North, banking sector analyst and founder of Digital Finance Analytic says the RBA needs to introduce big changes to encourage “real economic growth”, rather than continuing to rely on the country’s lit property market.

“We have to change the landscape so that banks have a greater imperative and incentive to lend to the commercial sector — because that’s the sector that will generate real, long term growth in the economy,” he told news.com.au.

“Without that we’re never going to get out of this doomed loop of ever lower rates, and we’re going to end up more like Japan.”

Japan introduced negative interest rates in an attempt to combat their own depressing economy. Negative interest rates charge savers to deposit money in a move to promote borrowing.

North has warned that the same could become a possibility for Australia if the RBA doesn’t change its attitude towards the issue.

“Once you get into this low rate environment, it’s hard to get back out of it. It is a really slippery slope, and once you slide down into it, it’s really tough to get back out of it.”

Marty reckons instead of continuing to cut rates, the RBA should be looking to encourage commercial lending by making home loans appear less attractive to banks. It’s a move that could see homebuyers in even worse shape than right now. Such an image is hard to imagine, no?

While those with a mortgage may have been cheering when the RBA announced it’s cut to a historic low of 1.5 percent, they were left pretty bummed out when the banks failed to pass them on to their customers.

Canstar’s group executive for ratings and financial services, Stephen Mickenbecker, says it’s all about protecting their profit margins. Because the fat cat’s gotta eat, right?

“They’ve had a few shocks coming at them with wholesale funding rates globally, but also the ‘too big to fail’ regulatory changes not only taking effect, but also coming towards them.”

Even if they did pass on the cuts, a small monthly saving on their mortgage repayments isn’t going to get them out buying stuff and stimulating the economy. But by “firing up” the commercial sector, North says we can do much better without digging ourselves into the same hole that Japan currently resides in.

Feature image: abc.com.au