Devil in detail of interest rate cap

UAP plan ’devastating’

THE United Australia Party’s signature policy for a 3 per cent cap on home loan interest rates has been torpedoed by a blowout in government borrowing costs – that UAP leader Craig Kelly did not know had occurred.

Meanwhile, the nation’s banks have broken their silence on the proposal, saying it would “wreak havoc”.

Amid growing fears housing repayments are about to go through the roof, the UAP is spending millions of dollars promoting its 3 per cent cap idea on billboards and other advertising.

But the party has not attempted to explain how its policy would work, until now.

Mr Kelly said the cap could be enacted by the federal government selling Treasury bonds to investors at 0.1-0.2 per cent and on-lending that cheap cash to retail banks, which would then be able to keep mortgage rates at no more than 3 per cent, regardless of monetary policy action by the RBA.

The peg would cover existing owner-occupier loans only and be in place for five years, Mr Kelly said.

Mr Kelly volunteered he had not recently checked the yield on five-year Treasury bonds, but that he should have. While he was unsure about the exact yield, Mr Kelly said it was “a long way below 3 per cent”. Shortly after, he paused the interview to check, after which he said the five-year bond yield was 2.21 per cent.

That was also wrong. The correct figure was 2.92 per cent.

Australian Banking Association chief executive Anna Bligh said “the idea that banks can remain strong and viable lending money at a price lower than they have sourced it, is just ‘magic pudding’ economics’”.

Former Department of Prime Minister and Cabinet economist Angela Jackson said the consequences of the idea would be devastating.

“It sounds good,” Dr Jackson said, “but this would be in the long term a really negative economic policy for Australia.”