There is no boom in borrowing says RBA
Interest rate cuts are losing their potential at stimulating the economy, Reserve Bank deputy governor Philip Lowe says.
Lowe said rate cuts were having little effect on household consumption because retirees and other savers were instead cutting back spending as their incomes fell in line with deposit rates.
"At the end of the day, the solution to the problems caused by the disconnect between the desire to save and the desire to invest cannot lie with monetary policy," he said in a speech in Sydney yesterday.
"Instead, it lies in measures to improve the investment environment so that once again there is strong productive demand for the use of our societies’ savings."
Lowe noted borrowers with debts have been using the lower rates to accelerate repayments rather than raising their spending.
Lowe said monetary policy was becoming less effective worldwide, in a speech titled, 'Low Inflation in a World of Monetary Stimulus' to the Goldman Sachs Annual Global Macro Economic Conference.
“In the years leading up to the (global financial) crisis, a reduction in interest rates could be reliably predicted to encourage such a response,” Lowe said.
“Credit was easily accessible, economic volatility in many economies was low and people were prepared to borrow.
"In today’s world, things look quite different.”
“Many borrowers have responded to the lower interest rates of recent years by paying off their loan a little faster, rather than increasing their spending.
“Conversely, it seems likely that those relying on interest income have reduced their spending by more than would previously have been the case.
“Certainly, the many letters we have been receiving at the bank recently would suggest this.
“In (this) earlier period, the level of interest rates that we have today would have caused a large boom in borrowing, but this has not occurred.”
Dr Lowe said the same reaction to low interest rates could be seen in governments.
“Few governments have seen the very low interest rates as an opportunity to support long-term infrastructure investment at low cost.
“Rather, much as households have done, governments have taken advantage of the lower debt-servicing costs to help shore up their finances.”
