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‘Conundrum’ sees Costello ponder October rate cut

By Grace Ormsby · September 30 2019
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Peter Costello

‘Conundrum’ sees Costello ponder October rate cut

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By Grace Ormsby · September 30 2019
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Peter Costello

There’s a fair chance Australia is headed for a further cash rate cut tomorrow, according to former federal government treasurer Peter Costello.

Speaking last week at Yahoo! Finance’s All Markets Summit, the longest-serving commonwealth treasurer to date went so far as to say that a rate cut on the first Tuesday of October “may not be the end of it”.

“We’ve never lived through interest rates this low,” he said.

“Weve never lived through a cash rate of 1 per cent and its going lower.”

Calling the current economic conditions “abnormal times”, Mr Costello reflected on the “big conundrum” affecting Australia at the present time.

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He began by acknowledging that indicators of the Australian economy are “reasonably good”.

“And yet, we have interest rates which are near-emergency levels,” he said.

“What do we conclude from that? That the interest rates are wrong? Or do we put it the other way around and ask ourselves, well, where would the economy be if the interest rates were normal?

“Do we look at an economy thats reasonably good on the indicators and say the glass is half full? Or do we look at it [as] an economy which is propped up by emergency interest rates and say, actually its half empty?”

According to the former treasurer, “we’re actually sitting at a pretty sweet spot”.

“If you want some evidence of that, we’re running trade surpluses and current account surpluses,” Mr Costello said.

While growth for the year was just 1.4 per cent, he advised that 1 per cent of that growth had come in the last two quarters.

So, “why would the bank be thinking of cutting rates now?” Mr Costello asked of the crowd present.

He cited the speech given by Reserve Bank of Australia governor Philip Lowe at Armidale Business Chamber where he said “we don’t want our exchange rate to go up”.

Paraphrasing, Mr Costello said “what he was basically saying was this: if everybody else in the world is cutting rates and we don’t follow, our exchange rate will go up”.

“There’s a bit of a race to have the lowest exchange rate at the moment.”

The former politician said that “in the trade, it’s known as the race to be the shortest pygmy”.

“Rates are all going down and you want to be the shortest pygmy in the room,” he continued.

“The US wants to devalue, Europe wants to devalue, [and] the pound – Brexits going to fix the pounds devaluation.”

The former treasurer further explained that “we dont want the AUD going up at a time when everybody else is going down”.

“So, to a degree, if everybody else is into rate cuts, well be part of it as well because we want that stimulation of a competitive exchange rate, and I think thats a very big part of the bank’s thinking at the moment.”

‘Conundrum’ sees Costello ponder October rate cut
Peter Costello
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About the author

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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About the author

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

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