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Wednesday, August 07, 2013

Half true. Governor worried, rates not at emergency lows

"Remember the Reserve Bank said that 3 per cent or the Government said that 3 per cent was emergency levels. So, if the Reserve Bank keeps cutting beyond that, understand this - it's because they're worried about the Australian economy."

Joe Hockey, August 5, 2013

Once our politicians boasted about “keeping interest rates low”. In 2004 the former prime minister John Howard campaigned from a lectern emblazoned with those words. Even on Tuesday shadow treasurer Joe Hockey promised that on average, interest rates would always be lower under the Coalition.

But he said on Monday that if the Reserve Bank did cut, it was “because the economy is deteriorating”.

The statement about the cash rate we are checking is this one: "The government said that 3 per cent was emergency levels. So if the Reserve Bank keeps cutting beyond that, understand this - it's because they are worried about the Australian economy."

Supporting evidence

Joe Hockey says that during the 2009 global financial crisis the cash rate was 3 per cent. The Treasurer Wayne Swan said at the time rates were at “emergency levels”. The cash rate is now much lower, at 2.5 per cent.

Does it stack up?

Reserve Bank governor Glenn Stevens doesn’t think he faces an emergency. He told a parliamentary committee in February his cash rate was near 2009 levels “not because we face an emergency like we did back then, but because we face some other forces of a more slowly evolving nature.”

And he explained in two speeches last year that he targets retail rates, not the cash rate.

As he put it: “They are the rates that matter, they are the rates that do the work in the economy, and we are trying to calibrate what we do to get what we think are the right levels for those.”

In his estimation retail rates are 1.5 percentage points higher than they used to be relative to the cash rate. So he has to cut the cash rate further.

In his words: “The normal level of the cash rate is lower than it otherwise would have been, a 3 per cent cash rate today is not the same as a 3 per cent cash rate in the past.”

Joe Hockey is right to say Governor Stevens is cutting rates because he is worried about the economy. But he is wrong to suggest the rates he is targeting are yet at emergency lows.


Politifact rates the claim “half true”.

In Politifact and The Sydney Morning Herald

Related Posts

. Memories. Keeping interest rates low

. July. Inflation is too low. Stand by for a pre-election rate cut

. June. Why the Reserve is prepared to cut again