As prime minister John Howard famously bragged that interest rates were always lower under a Liberal government.
“Who do you trust to keep interest rates low?” was the Liberal Party’s tried-and-trusted slogan.
But Australia’s second-longest-serving PM has declared the cash rate in Australia has been cut “perhaps too far” and that he doesn’t agree with the Reserve Bank policy.
The official cash rate in Australia is at a record low of 1 per cent.
To put that in context, back when Mr Howard was bragging how low they were during the 2004 election, the cash rate was 5.25 per cent.
Speaking at the Diggers and Dealers mining forum in Western Australia, Mr Howard said he was concerned the RBA would have little room to move in the event of a crisis.
“I’m not sure that these interest rate cuts have been the right thing to do,” he told ABC’s The Business program.
“I think we’ve cut interest rates probably far enough already, perhaps too far. But I don’t think my advice will be taken.
“If you cut them too far, you get rid of all the petrol in the tank.
“If something unexpected comes along, you don’t have the same room for manoeuvre.
“It’s a point of view, and I’m not claiming any special expertise, but I think we’ve gone quite far enough and perhaps too far.”
The Reserve Bank painted a sombre picture of the economy when it published its reasons for leaving interest rates on hold on Tuesday.
“Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices,” the RBA statement said.
“There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent.
“Wages growth remains subdued and there is little upward pressure at present.”
One number missing
During the 2004 election, the Liberal Party’s advertisements noted that interest rates under Gough Whitlam were 10.38 per cent, 17 per cent under Bob Hawke and 12 per cent under Paul Keating.
These rates were the bank lending rate to borrow for a house, not the RBA’s cash rate.
It is perhaps noteworthy that Mr Howard excluded the fact interest rates were 13 per cent when he was treasurer.
Interest rates were in the double digits for most of the 1980s before hitting 17 per cent in June 1989.
Consider for a moment how much higher your current mortgage repayments would be back then.
Consider a home loan in Australia today is $450,000.
Servicing the average loan at the average standard variable rate over 25 years would cost about $2000 a month.
When interest rates hit a record high of 17 per cent, that monthly interest repayment would be closer to $6500.
Little wonder there were forced sales.
It’s important to note, however, that housing loans were smaller.
Back in 1990, the average loan size was $67,700 and the average income was $27,284.
Mortgage payments were soaking up 42 per cent of workers’ income.
Last year, the average loan size was $388,100 – much more than double the average salary of $81,000.
But the average amount of salary that workers are forced to devote to repayments is much lower at 28 per cent today because of record-low interest rates.
Bad news for seniors
Low interest rates are also bad news for seniors looking to put their money in bank deposits, a fact reflected in the Morrison government coming under pressure to reform deeming rates for pensioners.
Labor’s treasury spokesman Jim Chalmers said today’s low interest rates are a sign the economy is struggling.
Wages are stagnant, 1.8 million Australians are looking for work or more work, household debt is high, and living standards are going backwards. 5/10
— Jim Chalmers MP (@JEChalmers) August 6, 2019
“If Scott Morrison and Josh Frydenberg were doing a good job managing this economy, the RBA wouldn’t have needed to cut rates to historical lows,” Mr Chalmers said.
“It is time the Liberals stopped wasting everyone’s time playing politics and talking about Labor, and focused instead on a plan to turn this floundering economy around.”