RBA should ignore “market hysteria”

Adam Smith 28 July 2016

oz moneyA former Reserve Bank governor has warned against “market hysteria” after the lowest inflation figures for 17 years.

Australian Bureau of Statistics (ABS) inflation figures for the June quarter have revealed the consumer price index (CPI) increased by just 1% year-on-year. The result is the lowest annual inflation figure since June 1999.

Former RBA governor Warwick McKibbin has warned the Reserve Bank to look past “market hysteria”, and urged against further cutting the cash rate. McKibbin told the Australian Financial Review another cut could distort house prices.

“With financial markets there seems to be this hysteria that rates need to keep going down. I don’t buy that in the Australian context,” McKibbin said.

McKibbin also pointed to countries whose central banks drastically cut their official interest rates to stimulate their economies, and argued that these policies were unsuccessful.

“Suppose you do think you should cut. How successful has it been for all those other central banks that went to zero [percent]?” McKibbin told the AFR.

McKibbin said such policies had led to negative rates in Japan and Europe, and had seen bank balance sheets contract.

“It really isn’t the right set of policies to get you out of this low nominal income growth world,” he told the AFR.

Instead, McKibbin said there could be a case for fiscal, tax and productivity reform.

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