That’s the thing about an interest rate cut. While business borrowers and mortgage holders will always welcome any reduction in borrowing costs, RBA governor Glenn Stevens’ post-cut statement contained a few worrying smoke signals.
Here’s Stevens on the mining boom:
“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
Here he is on employment:
“Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low. The bank’s assessment, though, is that the labour market has generally softened somewhat in recent months.”
Here he is on China:
“Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”
And here’s his conclusion:
“At today’s meeting, the board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”
Don’t you just love the use of the word “little”? It just sounds so … calm. A little slowdown here, a little more accommodative there, everything’s absolutely fine everybody!
World’s Greatest Treasurer Wayne Swan was quick to come out and welcome the rate cut news, but his opposite number Joe Hockey was waiting with a zinger — way back in 2009, Swan said that when rates hit 3% they would be at “emergency” levels, so surely the rate cut can’t be that welcome.
Dredging up stuff people said years ago is always a bit of a dirty trick, but Hockey does have a little point — the relief provided by the rate cut shouldn’t blind us to the fact that the economy is slowing, and no one quite knows what is coming after the mining boom ends.
The idea of the rate cut being less than welcome news was taken up by CommSec economist Craig James, whose research note following the rates decision carried the alarmist title: “Rate cut: Will it help or hurt?”
James’ point was that not everyone is a borrower and rate cuts actually hurt the legions of savers in Australia:
“The number of savers has soared and currently deposits are creeping up to be almost neck and neck with loans. Deposits represent around 90% of loans outstanding, well up from 75% just five years ago.”
But more than that, James asks whether the interest rate cut will actually stimulate spending (James is a part of a growing group of economists arguing that the impact of rate cuts is now muted):
“The $64 question is confidence. If people don’t have the confidence to spend and instead continue to save and pay off home loans at a faster rate, then the rate cut will have no impact on activity.
“It is also important to note that it is the level of interest rates that does the hard lifting work in the economy, not the change in rates. Interest rates are already below longer-term averages. And judging by what has happened in previous months, home borrowers are more likely to respond to a rate cut by paying off their home loan at a faster rate, rather than going on a spending spree.”
I hope James is wrong and this rate cut has set our retailers up for an improved Christmas. But as he says, households need confidence and the undisputed key to confidence is job security. The RBA’s concerns about the softening labour market says to me that job worries will also stay high on consumers’ minds.
That means the impact of this rate cut could again be muted, and the RBA may well cut again in November.
*This article was originally published at SmartCompany
I keep wishing for a better world, one where the ‘money experts’ wouldn’t constantly harass us with their irritating blind and biased clap trap.
Just to quickly illustrate with one example from many in the article-“Joe Hockey was waiting with a zinger …”.
Oh please, some reality.
Why Crikey, why do you subscribe to these mobs ]BS is another] that constantly spew trivia, why not get some informed persons to comment instead?
There’s a vital flaw in this supposed solution for retailers – if my term deposits are returning less then my budget becomes more restricted. People with mortgages may have more to spend on Christmas frippery and general cr@p but term depositors have less to spend.
Of what benefit is this to the economy?
The cruel reality: there are simply too many retailers, a gross oversupply of endless shops in identical soulless malls stocking stuff we don’t need.
Is increased saving really such a bad thing? Traditionally, for every $100 Australia earned, we spent about $106, leading to a high level of indebtedness and all the insecurity that that entails. Is spending everything we earn on what is mostly ephemeral junk a sign of a healthy economy?
no one quite knows what is coming after the mining boom ends
From essai by Richard Cantillon 1730
“If the money comes from mines, the first people to be affected will be the mine owners and workers in the mining industry.Thier incomes will rise and they will spend more, which will raise the prices of the goods they buy. This will increase the incomes of the farmers and manufacturers from whom the goods are bought, who in turn increase their spending raising other prices and incomes. Money will gradually spread throughout the country, raising prices as it goes. As prices rise, producers will find that their costs have risen, forcing them to raise prices futher. As prices continue to rise people will be encouraged to buy abroad, where goods are still cheap. This will ruin manufacturers. When the inflow of money ceases-perhaps because the mines are exhausted (or china slows down)Money will become scarce, and poverty and misery will follow. Because much of the gold silver (or cash) will have gone abroad to pay for increased imports, the state will end up with any more money than its neighbors. So there is your answer poverty and misery will follow.
It stands to reason, as argued by Adam Smith, (Who??) that as savings grow to match deposits (as reported in the article) then the price which can be demanded to borrow money will have to fall.
Which is why Adam Smith said in effect that the “Idle Rich”, who live off their interest have, in turn, an “Interest” to deceive and oppress the public by acting to reduce to the amount of savings, usually through reducing wages,thus making money scarce and increasing interest rates and the returns on lending.
Just what the precursors of the Liberal party did in their role as the English East India Company, in what was then Bengal, by controlling trade through the ports, reducing wages to just enough to survive for a day and begetting interests rates of 48%.(pre-1788 and subsequently all over the colonisation of Australia).
Those who care to argue; just read The Wealth of Nations.
As for those living on the interest of their term deposits why not spend it?
Or ask some pious politician to point out the Mosaic injunctionns against usury?
When is Hockey (he really wants to) going to speak out against the entitlement mentality of Adam Smith’s “Idle Rich”.
As for those savers who want do get out of debt, idle rich, get your politicians out of their way.
They’re on to you.