Peter Costello appeals to RBA to hold on cutting interest rates

Former treasurer Peter Costello has urged the Reserve Bank to refrain from cutting official interest rates to a new record low.

Former treasurer Peter Costello. Picture: Josie Hayden

Former treasurer Peter Costello has urged the Reserve Bank to refrain from cutting official interest rates to a new record low out of fear it could reignite a housing price bubble in Sydney and Melbourne following a “welcome correction” in home values over the past year.

As the RBA board prepares to meet next week for the first time since ­December, Mr Costello said the central bank had to be “very careful” it did not risk further pumping up house prices by cutting official interest rates, which he said were failing to stimulate the economy.

“Money is cheaper than any of us have ever experienced in our lifetimes. That is feeding into asset values. Not only stockmarkets but property market as well,” Mr Costello said.

“Asset markets have been pumped up by cheap money.”

Mr Costello said high debt levels were “quite sustainable on cheap money but you’d have to ask yourself what happens when that era comes to an end. It’s good to be cautionary,” he said.

“At some point monetary ­policy will go back to more normal levels.

“We’ve lived through a period of cheap money. The Reserve Bank has been cutting the cash rate in the last year in an effort to stimulate the economy. I think that the effectiveness of monetary policy is coming to an end.

“Another 25 basis points, ­another 50 basis points, I don’t think you’ll get much stimulus in the real economy.

“But I do think that you will continue to kick up asset values. I don’t think that’s particularly a good thing. I think we’ve kicked off again the asset price movement in Sydney and Melbourne just after we have had a welcome correction. It will end badly if we get asset price movements based on cheap money.”

According to NAB’s monthly business survey released on Tuesday, Australian business confidence dived to a 6½-year low before the bushfire crisis hit this month and business conditions weakened.

With business confidence likely to have taken a further hit as the bushfires turned into a ­national crisis, the data may ­support the chance of further ­interest cuts from the Reserve Bank.

The chance of an RBA rate cut at the February board meeting next Tuesday slumped to 24 per cent from 62 per cent after stronger jobs data last week took the unemployment rate down to 5.1 per cent.

“Stimulus through combined tax relief, interest rate cuts, infrastructure spending, lifting mining investment and a weaker Aussie dollar is expected to eventually boost economic growth, but confidence remains the biggest behavioural hurdle in 2020,” CommSec senior economist Ryan Felsman said.

“Commonwealth Bank Group economists continue to expect another interest rate cut from the Reserve Bank in the coming months to support the economy.”