Wed Sep 25

Richard Holden says no interest rate fall likely for 12 months

Written by Michelle Grattan, Professorial Fellow, University of Canberra

For many Australians, the COVID-19 pandemic has become a fading memory as the world has moved away from lockdowns and masks. However, its lasting impacts, including persistent inflation, remain.

Academic economists Steven Hamilton and Richard Holden, in their just-published book, Australia’s Pandemic Exceptionalism ^[1], examine how Australia fared in handling the COVID crisis in its economic and health policies.

We’re joined on the podcast by Holden to talk about the book and also Australia’s economic outlook, during what has been a big week for economic news.

On COVID, Hamilton and Holden found a mixed picture: Australia scored highly in its economic response but fell down on its vaccine procurement and provision of RATs.

I think Treasury gave excellent advice to the Treasurer [Josh Frydenberg] and he not only […] took that advice but was able to sell it to a sometimes sceptical cabinet. […] So I think it was good advice and strong leadership on the economic front. On the health front, I think the advice was really quite poor at times. I mean we make quite a point of Scott Morrison’s use of the phrase when it comes to vaccines “It’s not a race” when clearly it was a race. It was a race against the virus. It was a race to get vaccinated. It was a race to be able to reopen our economy.

On the RBA and inflation, Holden agrees with this week’s decision to hold rates but believes they should have risen earlier at least once more:

I have argued […] that late last year or early this year, the Reserve Bank should have raised rates at least one more time to get us closer to what happened in peer jurisdictions overseas, to try and beat inflation faster. The Reserve Bank has taken a different approach. They want to have interest rates peak, maybe a full percentage point lower than in places like the US, and they’re willing to tolerate inflation for longer.

At least they’re not caving into political pressure from people like Jim Chalmers and Wayne Swan to precipitously cut interest rates and I give the governor, Michele Bullock, great credit for standing firm on that, including in her press conference remarks [on Tuesday].

On when interest rates will start moving down, Holden gives a grim assessment:

My view is the most likely case is very late in 2025, somewhere about 12 months from today. Again, it’s going to depend on the inflation numbers and I’d like nothing more [than] for us to be well inside the target band and for interest rates to be able to be moderated.

I think it’s a real shame that we took a different strategy in Australia to what peer jurisdictions overseas did, which was raise rates more aggressively, take our medicine, have tamed inflation and now be cutting rates. That’s the story in the US and several other jurisdictions.

Holden warns against RBA Governor Michele Bullock making predictions of future rate moves:

Governor Bullock, I think, is at risk of repeating, albeit a milder version of, the mistake that Philip Lowe made in providing forward guidance. Now it’s not as dramatic as saying interest rates are not going to rise until 2024, which was sort of three years of forward guidance or thereabouts. Governor Bullock has fallen into, I think, a little bit of a trap by saying over six weeks ago that she and her colleagues on the board didn’t think that interest rates would be cut this calendar year.

I don’t really understand what the virtue of her doing that was. I think that was probably, in hindsight, something that she may regret. [Although] I don’t think it will do any real damage because I think it’s a prediction that’s incredibly likely to come true.

On the government potentially making changes to negative gearing, Holden outlines why it could be a good idea:

Getting rid of negative gearing would put potential owner-occupiers on a level playing field with investors at an auction. I think it’ll be very good news for people trying to move from the rental market into being owner-occupiers; I think it’ll be good news for the classic Australian dream. To be fair about it, the existence of negative gearing is something that puts downward pressure on rents. So negative gearing, in a funny way, is good for renters who are always going to rent but bad for renters who want to buy. So there are pros and cons.

It was a good idea eight or nine years ago. I think it’s still a good idea today and I think it’s interesting that the government seems to be at least floating the test balloon.