Former RBA boss calls for 50-point rate cut

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 11 years ago

Former RBA boss calls for 50-point rate cut

By Peter Martin

THE former Reserve Bank governor Bernie Fraser has challenged his successors to cut interest rates 50 points today rather than the widely expected 25 points.

The bank will announce the decision at 2.30pm. The staff recommendation sent to board members on Friday is believed to recommend a cut of 25 points, arguing that the economy is not weak enough to demand anything larger and that rates can be cut again if needed.

''Trump expectations'' ... Bernie Fraser's advice will carry weight.

''Trump expectations'' ... Bernie Fraser's advice will carry weight.

With the exception of during the global financial crisis the bank has not cut by more than 25 points in a decade.

''Everyone is expecting at least a quarter and that loses its impact and its effect on confidence,'' Mr Fraser told ABC's 7.30 last night. ''You have to get ahead of the game occasionally and trump those expectations.''

Asked whether the bank should cut 50 points today, bringing its cash rate down from 4.25 to 3.75 per cent, Mr Fraser replied: ''Yes, I think the economic circumstances, signs of weakness in large parts of the economy and going with that a lack of worry about the inflation problems, provide an opportunity to do that.''

The privately calculated TD Securities inflation gauge released before the board meeting yesterday had inflation at 1.9 per cent - just below the bottom of the Reserve Bank's 2 to 3 per cent target band.

Asked on 7.30 whether the bank should have a formal target at all Mr Fraser said he opposed the action of his successor in signing the letter of agreement with the Coalition treasurer Peter Costello that made formal the 2 to 3 per cent target.

''I went out [of office] at the time treasurer Peter Costello entered into a letter with my successor, Ian Macfarlane. Ian did show me the letter, or a draft of the letter, and asked what I thought of it and I said I wouldn't sign a letter like that but it wasn't my call.''

''The reason I wouldn't sign it was that it was unnecessary. The Reserve Bank Act says what the bank has to do. It has to have regard to employment and growth as well as inflation. The letter was about giving priority to inflation. Orthodox central bankers don't need any encouragement to give priority to inflation.''

Advertisement

A former head of the Commonwealth Treasury, Mr Fraser ran the Reserve from 1989 to 1996 and drove big rate cuts to fight the early 1990s recession, followed by aggressive rate increases to keep inflation low.

Loading

Internationally respected, his call for the Reserve Bank to abandon caution will carry weight at today's meeting. Six of the nine bank board members come from the private sector.

The others are the governor, Glenn Stevens, his deputy, Philip Lowe, and the Treasury Secretary, Martin Parkinson.

Most Viewed in Business

Loading