Two official rate rises in the next six months would instil caution among investors without upsetting the economy at large, says Monash University professor Mark Crosby.

Speaking ahead of the RBA’s historic decision to leave rates unchanged at 1.5 per cent, the 21st consecutive decision to keep rates on hold, Professor Crosby said the central bank was slow in applying the brakes, in contrast to what was happening globally.

Crosby has urged two rate rises, warning that delays risk damaging the economy.

"The RBA has signalled that it won’t be raising rates in the next few months, but I believe this is just putting off a necessary rise for too long,” says Crosby, associate professor,director of bachelor of international business, at Melbourne's Monash University.

RBA rates Philip Lowe

The last time the RBA board moved rates was when it cut in August 2016

"It's always in the business of influencing market psychology, which is always difficult to predict. But in my view, a couple of rate rises in the next six months would be appropriate. This should be enough to tilt expectations towards more caution, but not enough to cause significant damage to the economy. The risk is that not doing this leads to much greater damage later.

"The criticism of this policy of raising rates now is that it's damaging the economy now to give the RBA more room to move later on. This is correct, but again it's also the case of the extent of imbalances that the current very low rates are causing," says Crosby.

The last time the RBA board moved rates was when it cut in August 2016. Prior to this decade Australian would have seen the cash rate closer to 6 per cent or more given current rates of inflation and unemployment.

This was widely expected, with few economists now tipping a rate hike before mid-2019.

"It might seem unambiguously a good thing to have interest rates so low, but the fact is that this isn't the case," Crosby said.

Low rates may leave borrowers better off but lenders fare worse from having a lower interest income, with many older Australians in this latter category, Crosby says.

"The second issue with lower interest rates is that they encourage people to borrow. This, of course, is the point and supports the economy, but it also creates risk.

"In Australia, household borrowing levels are extremely high, largely due to low interest rates and strong demand for housing.”

Crosby’s remarks coincide with worrying credit card debt statistics from the corporate regulator, the Australian Securities & Investments Commission (ASIC). Australians now owe about $45 billion in credit card debt alone - that's not including personal loans or mortgage debt. More than one in six people are struggling to service that debt.

This finding supports Crosby's next point: "The problem with excessive borrowing is that it can lead to a number of distortions in the economy, which can create huge economic problems when rates rise".

Too low for too long: the GFC warning

Comparing the Australian scenario with that of the US, Crosby believes low interest rates "left too low for too long after the 2001 recession" led to a housing price bubble, in turn a leading cause of the GFC.

"As rates were very slowly normalised, housing prices fell and banks and others exposed to housing faced massive problems," he says.

We're not heralding the next GFC but the concern is some similarities may occur in Australia if interest rates remain depressed for too long.

It's "a delicate balancing act" Crosby says. With rates influenced by international factors too, not just the actions of our Reserve Bank, international liquidity pressure could see mortgage and other rates increase anyway.

This last point is something we've started to see in Australia. Analysis by Citi suggests the big four banks - which fund up to 80 per cent of mortgages nationally - are expected to go it alone and raise rates independent of the actions, or inactions, of the RBA. Other banks will likely follow.

As Morningstar's head of equities research, Peter Warnes, wrote in last week's issue of Your Money Weekly:

"The Bank of Queensland cited higher funding costs for increasing its variable rate for owner-occupier principal and interest and interest-only loans by nine and 15 basis points respectively to 4.56 per cent and 5.02 per cent. Others are unlikely to sit on the fence for too long."

The flipside of the RBA manipulating interest rates is that it could lead to further problems in consumer sentiment, writes Monash's Crosby: "If the RBA raised rates, this would affect the psychology of household and other borrowers".

"If rates rise once, borrowers would then be concerned about further rises, and moderate their borrowing. This is a very delicate balancing act for the RBA."

 

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 Glenn Freeman is a senior editor, Morningstar Australia.

Associate Professor Mark Crosby is the director of the Bachelor of International Business Program at Monash University, Melbourne and has acted as a consultant to the Hong Kong Monetary Authority and the Monetary Authority of Singapore.

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