What does the cash rate cut do for you and the economy?
- August 8, 2016
- Posted by: wpgroup
- Category: Economics, Interest Rates
At the RBA meeting on Tuesday the 2nd Aug the signal was made clear by the Governor as the Fiscal setting was doing nothing to stimulate the economy then the Monetary lever had to be pulled to give a shot to the economy. The reasoning was that we are in deflation and confidence in both business and consumer is weak.
Wages are at historic lows and the budget of 2014 and 2015 has measured up-to $15 million that will never pass the senate, furthermore, the cuts to infrastructure at a time when the economy needs an injection is hard to understand. In addition we are not seeing lending to small business as we should and credit cards are being used as the funding tool at very high interest rates.
Small business employers however may shut their doors within twelve months of start up as they struggle with cash flow caused by the big companies taking up to 90 days to pay and compounded by the interest cost. Perhaps it should be legislated that all invoices are paid within 30 days across the board, this will circulate more money into the economy and keep more small business operators afloat.
The Bank of England has reduced rates to boost the economy as the head winds and ramification to Brexit is going to hurt the economy, in addition the Bank of Japan has also indicated a cut in rates to boost their economy that is lagging. Austerity that was seen as the tool to bring the economy back to where it should be has failed. There could not be a better time to invest in infrastructure as the cost of money is so low. The interest rate rise in the US that was forecast by the FED is now on hold pushing the A$ higher.
The lowering of rates by these two countries will see the A$ rise and stay strong creating a problem for our balance of trade. The RBA was clear in its intentions to boost the economy however, as usual the banks have not fully passed on the cuts. The change in consumer behaviour will see the savings go back into reducing debt and not flow into the economy and the business sector has again been hit. The major beneficiaries of these cuts will be the banks their shareholders and executives.
The RBA is acknowledging further stimulus is necessary to boost demand and get inflation back to the target range of 2-3%, the annualised rate fell to 1% last month. Lending in the housing sector has slowed this year which demonstrates that lower rates exacerbating risks in the housing market has diminished. APRA has placed a premium on the banks’ lending to investors which has also had a slowing of activity in the housing sector besides the banks pulling out of lending to overseas borrowers. This is having a significant impact to buyers who have paid deposits and are unable to get finance leaving developments in limbo, the question to be asked is how this will impact the housing sector as developments are nearing completion.
The full impact of unemployment with the closure of the car industry will be a big hit in 2017 as there are no jobs in sight for these workers besides the hit to the social well -being for these families, the cost in social security payments and the loss of income tax receipts to the government. Our view is that the RBA will have to use the monetary lever at least twice again.
Any country without a strong manufacturing base is always going to be hurt, just look at the countries like China, Japan, South Korea, India and the USA how much they fund their respective automotive industry. Manufacturing industries that left the USA are now returning to USA. We had a great opportunity to establish the renewal energy hub of the world but the opportunity was squashed by ideology and not good economics. In addition the best brains in this country at CSIRO have been trashed and the brain drain has commenced.
It is hard to fathom from where job and growth will come from. The long term structural changes are fundamental and necessary and not the political cycle of three years it is hurting this great country.