Lift interest rates now to avoid problems later: Costello

The Australian 12:00am August 21, 2017

Adam Creighton

Peter Costello, chairman of the nation’s $130 billion Future Fund, has urged the Reserve Bank to lift interest rates now to avoid households’ taking on more debt, which he says is contributing to “massive imbalances” in the economy.

The nation’s longest-serving treasurer also expressed concern that the Turnbull government was balancing the budget mainly by lifting taxes. “The worry is we do it on the revenue side rather than spending side,” he said, suggesting lifting taxes would lead only to calls for more spending.

“We have to normalise interest rates, and the longer you leave it the more unbalanced your economy is going to get,” Mr Costello said, suggesting Australians weren’t “worrying about debt ­because they can get it at such low rates”.

The value of owner-occupier and investor mortgages have soared about 30 per cent to $1.7 trillion since the Reserve Bank started cutting the official cash rate from 3.5 per cent to 1.5 per cent in 2013, putting a rocket under Sydney and Melbourne house prices and making Australia’s households among the world’s most indebted.

“Once (the price of) money ­returns to more normal levels, what is going to happen to asset prices and the housing market?” he said, foreshadowing a “big problem” when those prices ­reversed.

Mr Costello, who as treasurer in the Howard government formalised the Reserve Bank’s policy independence in 1996, dismissed the RBA’s concerns that higher rates would boost the Australian dollar, making it harder for ­exporters.

“Well that’s not one of their goals. Nowhere in the Reserve Bank framework does it mention currency,” he said. “I remember Alan Greenspan said to me around when our currency went to 49c that we know less about what moves the currency today than at any time in human ­history,” Mr Costello said.

RBA governor Philip Lowe told parliament earlier this month that the currency rise to US80c had become an “issue”. “A lower currency would be more helpful,” he said.

Separately, former Business Council chief Tony Shepherd yesterday backed Mr Costello’s call in The Weekend Australian to ­review the four-pillars policy, ­including allowing foreign ownership of the big four banks to boost competition. “He makes very good sense and has had deep involvement in the finance sector,” Mr Shepherd said.

“We would probably need to retain majority Australian ownership and nationals on the board though.’’

In an interview with The Australian to mark 10 years since the beginning of the global ­financial crisis, Mr Costello urged Treasury to undertake an “honest ­appraisal” of its recommendations for massive stimulus — made up of $900 cheques, subsidies for pink bats and school halls — to combat the GFC.