‘You get rid of all the petrol in the tank’: John Howard warns interest rates may have been cut ‘too far’

John Howard has warned interest rates may have been cut “too far” already, as markets tip the RBA will cut again today.

Former prime minister John Howard has warned that the Reserve Bank may have cut interest rates “too far” already, leaving Australia lacking ammunition in the event of another global shock.

The US Federal Reserve last week slashed its key interest rate for the first time since 2008 after the RBA’s two consecutive cuts in June and July brought Australia’s cash rate to a new record low of 1 per cent.

The board meets in Sydney this afternoon for its August meeting, and while most economists expect the RBA to hold, financial markets are now tipping another 25 basis point cut to 0.75 per cent.

On Monday, ASX cash rate futures were pricing in a 57 per cent expectation of a cut today, a sharp increase from 49 per cent last Friday. The market has fully priced in a rate cut by October or November.

Speaking to the ABC on the sidelines of a Kalgoorlie mining conference on Monday, Mr Howard said he was “not sure that these interest rate cuts have been the right thing to do”. “I think we’ve cut interest rates probably far enough already, perhaps too far,” he said.

“But I don’t think my advice will be taken. A number of reasons why we came through the GFC so well is that our interest rates were higher when we entered the GFC and the central bank had room to move.”

He added, “If you cut them too far you get rid of all the petrol in the tank. If something unexpected comes along you don’t have the same room for manoeuvre. It’s a point of view, and I’m not claiming any special expertise, but I think we’ve gone quite far enough and perhaps too far.”

Asked if there was more the Federal Government could do to kickstart the flagging economy, Mr Howard said the “best thing” the Government did “was to get re-elected”.

“It lifted the threat of punitive additional taxes on Australian business and Australian individuals,” he said. “I think the sense of relief that we don’t have those extra taxes is over time going to prove very valuable.”

Mr Howard added that mining had played a “huge” role in saving Australia from the worst consequences of the global financial crisis. “Over the years it’s been a wonderful earner,” he said.

“It’s provided a lot of the nation’s wealth, and I think it’s an underappreciated sector. I find it rather strange that sections of the mining industry should be under constant attack when so much of our wealth and prosperity has been due to the mining industry.”

The RBA board meets in Sydney this afternoon. Picture: Matthias Engesser/AAP

As the sharply escalating trade war between the US and China sparked a bloodbath on global share markets overnight, Mr Howard was asked whether Australia was in a difficult position.

“That only becomes a difficult relationship if we handle it badly,” he said. “And that is if we … get obsessed with choosing. You don’t have to choose. You can have good relations with both but they’re of a different character. We’ll always be closer to America because our values are the same, but we have a great economic link with China.”

He pointed out many Australians had Chinese heritage and Chinese was the most widely spoken foreign language in the country.

“It’s in our interests consistent with our values to have a good relationship with China and that’s the role of the Government,” he said. “I think the Government is handling it well and I think previous Labor governments have done a pretty good on that front as well.”

If the RBA holds today, the timing of the next cut could become clearer this week when the RBA announces its revised forecasts and the Australian Bureau of Statistics releases its new lending data for June.

Wednesday’s release by the ABS, which includes data on mortgage lending, should give clarity about whether the first of the RBA’s two 0.25 percentage point cuts have had any stimulating effect on the key Sydney and Melbourne housing markets.

Mortgage lending excluding refinancing fell by 2.4 per cent in May as housing investors kept their hands in their pockets about the time of the federal election. The consensus forecast for June is for a 0.4 per cent improvement, while Westpac’s Bill Evans has tipped a 1.0 per cent improvement.

“Recent interest rate cuts should provide more of a lift as we head into the second half of the year,” Mr Evans said.

Nonetheless, he expects the RBA to next cut in October and again in February, while AMP’s Shane Oliver agrees on February but is tipping November for the first move.

On Thursday the RBA will release its Statement on Monetary Policy, which will include the bank’s updated forecasts for economic growth, inflation and unemployment.

When the bank cut the cash rate in July, RBA governor Philip Lowe said the bank would adjust again “if needed”, which was widely interpreted as the central bank adopting a short-term watching brief.

“The RBA is waiting to see the impact of its June and July rate cuts and the Federal Government’s tax cuts for low and middle income earners, and in particular it wants to see lower unemployment,” Dr Oliver said.

— with AAP