Liberal MP Tim Wilson has challenged the Reserve Bank to justify the effectiveness of its monetary policy by demanding to see evidence that further rate cuts will boost household spending.
In a series of questions on notice to the RBA, seen by Guardian Australia, the chair of the house economics committee has also asked for clarification of what “unconventional” methods to boost the economy it would consider adopting and what impact increasing superannuation to 12% would have on workers’ disposable income.
After two consecutive cuts in June and July, to bring the cash rate to an unprecedented 1%, the RBA has signalled a prolonged period of low interest rates and possible further cuts.
The Morrison government has encouraged states to boost infrastructure spending but has suggested supply constraints – and a desire to maintain a budget surplus – will limit the federal government in using fiscal policy to boost the Australian economy, leaving the RBA to do the heavy lifting with interest rates.
But Wilson told Guardian Australia he has “voiced caution” on whether lowering rates is an effective tool, and that “hadn’t changed based on the answers provided by the RBA” at a committee hearing on Friday.
Wilson asked the RBA for modelling on whether Australia’s ageing population and falling rates of home ownership are having an impact on monetary policy, along with evidence that rate cuts boost cash flow, after the effect on Australians with savings is taken into account.
He also suggested that many homeowners “often see no reduction in their overall repayment” when rates are cut “with any gap from reduced rates taken as an additional payment off the principal of the loan”.
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On Tuesday the RBA revealed it had considered a range of “unconventional monetary policy” methods used overseas, confirming evidence on Friday that quantitative easing and near-zero interest rates had been considered as options of last resort.
The RBA governor, Phil Lowe, said it was “unlikely but it is possible” the central bank would have to set the cash rate near zero or use quantitative easing and it is “prepared to do unconventional things if the circumstances warranted it”.
He explained if central banks around the world went to zero interest rates and “growth is very weak … then these options are going to need to be on the table”.
Lowe said quantitative easing would consist of purchasing government securities, which it would do only after a few more rate cuts.
Wilson told Guardian Australia he has a “particular concern about the wealth transfer impacts of quantitative easing”.
“If you have assets it protects your wealth, but the cost is worn by those trying to get into the market through higher prices.”
Economics lecturer at Adelaide University Dr Steven Hail told Guardian Australia that further rate cuts “will have some short-term positive effect on spending”.
“But that’s not entirely clear, because changes in rates redistribute money to those with lower interest rates on their mortgages, but someone suffers with lower interest rates on their term deposits,” he said.
With the second-highest household debt in the world, Hail suggested lower rates are unlikely to encourage more debt and spending.
“The only way to stimulate the economy – if authorities wanted – is for Josh Frydenberg to do it. Only fiscal policy works, particularly at this stage in the cycle.”
Hail, a modern monetary theorist, believes governments should use deficit spending to stimulate the economy unless and until inflation is an issue. He said as the RBA has missed its inflation target for six years there is “no significant risk of inflation” in Australia.
