United Australia Party plan to cap home loan interest rates is ‘magic pudding’ economics and would ‘wreak havoc’, banks warn

Clive Palmer’s United Australia Party has a grand plan to cap home loan interest rates – but economists and banks have fought back explaining why it won’t work.

The United Australia Party’s signature policy for a 3 per cent cap on home loan interest rates has been torpedoed by a blowout in government borrowing costs — that UAP leader Craig Kelly didn’t know had occurred.

Meanwhile the nation’s banks have broken their silence on the proposal, saying it would “wreak havoc”.

Amid growing fears that housing repayments are about to go through the roof, the party bankrolled by billionaire Clive Palmer is spending millions of dollars promoting its 3 per cent cap idea on billboards and other advertising in the mortgage belts of Australian state capitals.

But the UAP has not attempted to explain how its policy would work, until now.

In an interview with News Corp, Mr Kelly said the cap could be enacted by the federal government selling treasury bonds to investors at 0.1 to 0.2 per cent and on-lending that cheap cash to retail banks – which would then be able to keep mortgage rates at no more than 3 per cent, regardless of monetary policy action by the RBA.

United Australia Party leader Craig Kelly at the party’s campaign launch at founder Clive Palmer’s Coolum Resort. Picture: Brad Fleet

The peg would cover existing owner-occupier loans only and be in place for five years, Mr Kelly said. It would stop people losing their homes, save marriages and prevent families from having to take their children out of school to move to cheaper areas, he added.

The policy would supposedly impose no financial burden on banks or taxpayers.

Mr Kelly volunteered that he had not checked the yield on five-year treasury bonds recently, but that he should have.

While he was unsure about the exact yield, Mr Kelly said it was “a long way below 3 per cent”.

Shortly after, he paused the interview to check, after which he said the five-year bond yield was 2.21 per cent.

That was also wrong. The correct figure was 2.92 per cent.

“The important point is I knew it was below 3 per cent,” Mr Kelly said. The basic principle is correct.”

When told of Mr Kelly’s comments, Australian Banking Association CEO Anna Bligh said “the idea that banks can remain strong and viable lending money at a price lower than they have sourced it, is just ‘magic pudding’ economics”.

“Aside from the obvious lack of rigour or detail behind this particular proposal, if any policy from any political party based upon this principle ever saw the light of day, it would simply wreak havoc across the banking and financial services sector,” Ms Bligh said.

Mr Kelly also argued the rate cap would not increase inflation by limiting the RBA’s ability to constrain consumers’ spending power and, in turn, demand.

“I don’t think it would have any significant effect on the inflation rate,” he said.

Clive Palmer has again spent a fortune on election advertising during this campaign. Picture: Brad Fleet

However, former Department of Prime Minister and Cabinet economist Angela Jackson said the consequences of the UAP idea would be devastating.

“It sounds good,” Dr Jackson said, “but this would be in the long term a really negative economic policy for Australia.”

Dr Jackson, now the lead economist at Impact Economics, said the cap would lead to higher inflation, more financial instability, lower economic growth and a reduced standard of living.

Got a story tip? Email us at [e-mail]

Know some goss or seen something in your electorate? Contact us at [e-mail]

Originally published as United Australia Party plan to cap home loan interest rates is ‘magic pudding’ economics and would ‘wreak havoc’, banks warn