Former RBA board member calls for rate hike

Appearing on the ABC’s Lateline program this week, ANU professor Warwick McKibbin said the official cash rate should never have been cut below three per cent.

“The fact that they have been cut now makes it much harder to get back up there,” Mr McKibbon said.

“I understand the decision, but I think higher interest rates would help us deal with other problems in the economy like the housing bubble in Melbourne and Sydney,” he said.

Mr McKibbin said he would like to see the RBA raise the official cash rate to three per cent.

“My rule of thumb is an interest rate really close to the nominal growth rate of the economy and the economy's growing at around 4.5 per cent in nominal terms,” he said.

“So I think an interest rate close to three to 3.5 per cent is probably more like neutral policy.

“Three per cent is stimulatory policy and that's what we need.”

On Tuesday the RBA left rates on hold for the 14th consecutive month.

Reserve Bank governor Glenn Stevens said that on present indication, the most prudent course of action for the central bank is likely to be a sustained period of stability in interest rates.

As a result, the RBA is currently in consultation with APRA about implementing macroprudential tools to rein in lending.

But Mr McKibbin argues that the interest rate is a sufficient lever to put the brakes on investor demand – an area the RBA is most concerned about.

“It would slow down a lot of the investor demand that we're seeing driving up property prices,” he said, adding that low rates are fuelling speculative investor activity beyond the housing market.

“The problem with very low interest rates is it causes people to invest in a whole range of activities which look like they're very cheap to invest in because interest rates are low, but when interest rates begin to get back to normal levels, then you run into all sorts of problems that you hadn't been aware of during the boom.”