Both Commonwealth Bank chief economist Gareth Aird and St George Bank chief economist Besa Deda also expect it will take at least three years. “There is some risk of asset inflation if rates are kept historically low but the greater risk at present is excessively high unemployment,” Ms Deda said.
Westpac chief economist Bill Evans has a forecast of 2024, warning financial stability risks would emerge before this point.
Housing Industry Association chief economist Tim Reardon and NAB chief economist Alan Oster expect it could take until the middle of the decade.
“There may be some risk of super low rates for an extended period – usually we think of financial stability impacts of rates driving house prices higher as well as low rates impacting bank profitability and the flow of credit,” Mr Oster said.
However, he said the economy needed as much support as possible to get through the recession caused by the pandemic and there were other ways to address financial stability and rising house prices.
AMP Capital head of economics Shane Oliver said it would take “many years” and the RBA should formally move to forward-looking inflation average targeting and commit to keeping interest rates low until full employment is reached.
He was concerned keeping rates at low levels for a long period leads to excessive leverage and financial instability, but this could be managed with prudential regulation.
BIS Oxford Economics chief economist Sarah Hunter also warned low rates could cause a build-up of risk in the financial system.
This includes the possibility of rising mortgage debt but she said falling house prices meant the risk was lower.
Australian Council of Trade Unions chief economist Margaret McKenzie said low interest rates had the “consequence of heating” the stock market.
Some of the economists said the RBA’s policy settings alone were no longer enough to improve inflation. This included HSBC chief economist Paul Bloxham who said fiscal policy “now has to play the central role in seeking to drive the economy towards full employment, which will be needed to lift inflation”.
Newcastle University Professor Bill Mitchell said interest rate management had been used as a blunt tool to increase unemployment and push down the inflation rate.
“Under the current RBA board and management it will never meet its charter requirements and hasn’t been meeting them for years,” Prof Mitchell said.
University of Melbourne Professor Neville Norman said inflation growth could return to the range by the June quarter of 2021, though it depended on the speed of recovery and any recurrence of the virus.
“The risks of sustained low interest rates are encouraging poor financial decisions, especially housing and [in the] sharemarket and other speculative activity … that higher rates would in part restrain.”
However, University of Western Australia adjunct Professor Jakob Madsen did not foresee inflationary risks from the cash rate staying low, but said the RBA would be under pressure to push up interest rates when central banks overseas start to hike.
“We are not in a new normal, interest rates have to go up at some stage,” Professor Madsen said.
Jennifer Duke is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.