Cutting interest rates ‘not the answer’, says Warwick McKibbin

FORMER RBA board member Warwick McKibbin has argued against cutting interest rates to bring down Australia’s stubbornly high dollar.

FORMER Reserve Bank board member Warwick McKibbin has argued against cutting interest rates to bring down Australia’s stubbornly high dollar, and criticised the Reserve Bank for cutting them so low.

Professor McKibbin said the idea that lower rates reduced the dollar’s value were wrong. “We have had a really strange situation where we cut rates in Australia and we actually suck in more capital,” he told The Australian-Melbourne Institute Economic and Social Outlook Conference yesterday.

“Most people think if you cut interest rates capital will flow out, but if you cut rates and other assets (like housing) are fixed in supply and those asset prices subsequently rise, foreigners will want to hold more of those assets.

“Part of the reason we face an issue with price bubbles is that foreigners, once they buy the currency, are buying assets such as things stuck in the ground in fixed supply.”

Changes in foreigners’ attitude to investing in Australia dwarfed any impact the RBA could have on the currency from changing interest rates, Professor McKibbin said.

“For every quarter-percentage-point change in interest rates, the exchange rate might shift by half or 1 per cent, but if you reduce the global perception of risk of Australia assets by 1 per cent you get a 10 per cent appreciation of the currency,” he said.

Professor McKibbin said federal and state governments should absorb foreign demand for Aus­tralian assets by issuing longer-dated bonds, such as 50-year bonds, to foreigners to insulate other asset markets from price bubbles.

“We should never have cut rates as much as we did, but now that rates are too low it is a difficult question as to how we get back to normal,” he said.

He suggested official rates should be at 3.5 per cent rather than the current 2.5 per cent.

On the same panel discussing reform challenges, Deborah Cobb-Clarke, a professor at the Melbourne Institute, said policies that curbed welfare to young adults would hurt most those who had lower socioeconomic backgrounds.

Presenting new evidence from a survey conducted over many years, Professor Cobb-Clarke said: “By age 26 you’re three to four times more likely to be accessing income support in Australia if you grow up in a family that received it.

“Any policy change that pushes them back into the arms of their families will intensify any intergenerational disadvantage,”

The Coalition has proposed cutting unemployment payments for under-30s not earning or learning for six months at a time.