Catalyst of Australia’s next financial crisis: Costello shares his prediction

Peter Costello, Future Fund chairman and former federal treasurer, has warned that low interest rates may be the catalyst for the country’s next financial crisis, saying emergency economic stimulus measures shouldn’t be in place long term.

When the Covid-19 pandemic hit, banks around the world brought down interest rates in order to keep economies going and encourage spending.

During the RBA’s March meeting last week, Dr Philip Lowe, Reserve Bank (RBA) governor, said there were few signs of an inflation rise in Australia that would require higher interest rates, so the decision was made to maintain the current rate.

Lowe also confirmed Wednesday that the cash rate will remain at historic lows until 2024, as there’s no prospect of wages growth hitting more than 3 per cent before then.

Costello, who is Australia’s longest-serving treasurer, says the low rates represent ongoing economic weakness, and he is calling on the government to consider it’s “exit strategy” or risk facing another financial crisis.

Speaking at the AFR Business Summit on Tuesday, Costello said the issue facing central banks and governments was how to remove the low-rate stimulus, which was put in place to protect the economy during the pandemic.

“I understand what’s going on, that we’re trying to reassure everybody that monetary policy and fiscal policy will be supportive for as long as it is needed,” said Costello. “But I think the critical thing at the moment for central banks and governments is to think of the exit strategy. Because if we don’t have an exit strategy, we will be building up the next financial crisis, and you know what the next financial crisis will be? It will be asset bubbles.”

Low interest rates encourage borrowing money with less interest, which in turn boosts the economy during times of difficulty like the pandemic. However, if an asset bubble is to occur, many may be left owing far more than their assets are worth, which could be the catalyst for a recession.

Costello made the analogy that the ultra-low interest rates were like emergency medical treatments, which should be stopped as soon as the patient is better. “Imagine the patient is in the hospital and is in great pain, so you might be delivering morphine. But it doesn’t mean the patient should be on morphine once they recover,” he said.

In a statement issued earlier this week, the RBA said they would not be lifting interest rates anytime soon, and aren’t considering an increase until “inflation is sustainably within the 2 to 3 per cent target range”.

“The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets,” the statement said. “Together, monetary and fiscal policy are supporting the recovery in aggregate demand and the pick-up in employment.”

Despite this statement, YahooFinance reported that the booming property market could be creating the “perfect storm” and force the RBA to increase rates “sooner than expected”.

“The Reserve Bank doesn’t expect to raise the cash rate for three years or more, but unless property prices can be slowed, it will have to start looking for some way to apply the brakes,” Steve Mickenbecker, Canstar’s group executive of financial services, said.