Cutting interest rates a 'doomed loop'

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Critics of the Reserve Bank's approach to interest rates have warned that the constant cutting of interest rates to record lows could spell a downward spiral for the Australian economy.

According to Martin North, banking sector analyst and founder of advisory firm Digital Finance Analytic, real economic growth does not depend on the property market alone.

"We have to change the landscape so that banks have a greater imperative and incentive to lend to the commercial sector—because that's the sector that will generate real, long-term growth in the economy," he said. "Without that, we're never going to get out of this doomed loop of ever low interest rates and we're going to end up more like Japan," where negative interest rates are the norm.

Griffith Business School economist Fabrizio Carmignani also seconds the motion, agreeing that slashing rates was not the ultimate solution.

"We can't ask monetary policy to do much more. The government needs to stop being obsessed with debt and balancing the budget, and take a more expansionary approach," he said. "Fiscal policy is the tool we need to take to the economy with increased expenditure and public spending."

However, boosting lending to the commercial sector may not be popular with Australians struggling to break into the property market, as this would involve making lending to households less attractive and lending to businesses more attractive to banks.

"At the moment, they have to hold more capital for every commercial loan that they would have to for a mortgage loan," North said. "The banks like mortgage lending because it's lower capital and therefore more attractive to them in terms of profitability."

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