Costello says more rate cuts will inflate housing bubble

FUTURE Fund chair Peter Costello says further interest rate cuts are likely to do more harm than good, pumping up house prices to levels that “will end badly”.

The former treasurer also said the capacity of rate cuts to stimulate growth is all but at an end and the Reserve Bank needs to be “very, very careful” in how it proceeds.

Last year, the RBA delivered three rate cuts in a move that helped turbocharge Melbourne and Sydney property prices and lift the stock market to record levels.

“We have kicked off again the property price asset movement in Sydney and Melbourne just after we have probably had a welcome correction and I would hate to see that continue,” Mr Costello said yesterday.

“It will end badly if we get asset price movements which are based on cheap money. The effectiveness of monetary policy is coming to an end.

“Rates are now so low that another 25 basis points or another 50 basis points, I don’t think you will get much stimulation in the real economy but I think you will continue to eke up asset prices.

“It’s a question of rightly stimulating the real economy without running the risk of getting asset bubbles and that is where the Reserve Bank has to be very, very careful.”

Mr Costello was speaking as the Future Fund revealed it generated a 14.3 per cent return last year.

That tipped $21 billion into the coffers of the nation’s sovereign wealth fund, which is now worth $168 billion.

While arguing against further rate cuts, Mr Costello said the RBA’S inflation target of 2 per cent to 3 per cent was appropriate.

A number of economists have suggested the Government should lower the target to 1 per cent to 3 per cent – a move that would ease pressure on the RBA to lower rates.

Federal Treasurer Josh Frydenberg and RBA governor Philip Lowe agreed last year to keep the target unchanged.

“I think it is appropriate,”

Mr Costello said yesterday, noting a lower target would produce rate hikes.

“I don’t think we would get better policy by changing it.”

Mr Costello said rates had been falling since the global financial crisis.

He said he did not know how long the ultra-low interest rate environment would last but warned that asset prices would inevitably be hit when it ended.