The Reserve Bank of Australia will cut interest rates to a new record low but the move will load the economy with undue risk, a QUT economist says.
Dr David Willis, from QUT Business School, tipped the RBA to deliver a post-Easter treat to borrowers by slashing rates from 2.25 per cent to 2 per cent when it meets on Tuesday (7 APRIL).
But he warned the move was a gamble which could spook consumers rather than encourage them to spend.
"The RBA is set to move on interest rates solely on the basis of keeping the Australian dollar as low as possible," Dr Willis said.
"The aim is to assist the export section of the economy but such a move will have a marginal effect on the currency, as it is more influenced by what the US Federal Reserve does."
Dr Willis said the RBA's continued easing was "throwing more and more risk into the Australian economy".
"It is creating a number of bubbles in state capital housing, commercial property and stock assets. This will have to unwind at some point which risks creating the pre-condition of a nasty correction that could, in the right circumstances, cause a recession," he said.
"There is little to be gained from further monetary easing at this stage in the cycle and the stimulus to the economy at these low levels is marginal and could be seen as the opposite by consumers.
"In the past the RBA has only cut rates to avoid a recession or slow down and if consumers interpret another cut this way then they will focus on saving and reducing debt, not spending and investing.
"Therefore it could be argued that the RBA is setting the conditions for a correction in asset values that will not only cause losses through the housing, commercial and stock assets, but also the bonds market which could be quite significant."
Dr Willis said fiscal spending was the best way to provide a boost to the economy as it continued to transition away from a focus on mining.
"What is needed here is fiscal spending rather than monetary easing domestically to fill the gap between the mining and non-mining areas of the economy," he said.
"Further rate cuts fail to depreciate the currency and also load the economy with undue risk."
Media contact:
Rob Kidd, QUT Media, 07 3138 1841, rj.kidd@qut.edu.au
After hours, Rose Trapnell, 0407 585 901
