Australian household debt piles are a handbrake on growth and the reason why monetary policy in Australia is losing its effectiveness, outgoing RBA governor Glenn Stevens said in his last speech before stepping down next month.
“On the demand side, it seems more difficult to generate growth in spending in an economy where households are already carrying significant debt,” Stevens said.
This is so even though “the real cash rate has been about 140 basis points lower, on average, than in the preceding decade”.
That means the marginal return the RBA gets, in terms of an uplift in economic growth, for any given 25 point rate cut is falling because Australian’s either are unwilling, or unable, to take on any more debt to spend now and repay later.
It’s an argument that takes on added significance when you look at the level of household debt in Australia, which has risen to a new all-time high.
That the level of household debt is constraining the effectiveness of monetary policy is a critical point in understanding why rates in Australia may head to 1% and potentially below.
Modern central banking is predicated on the belief that in lowering interest rates central banks can effectively persuade consumers and business to borrow from the future in order to generate growth. If that transmission mechanism is broken, then rates need to go lower than was previously the case. – which is what’s happening in Australia now.
The RBA governor’s argument also reinforces the notion that rates in Australia will not be increased for a number of years.
The full speech is here.