Due to experiencing low inflation, soft economic growth, plunging in commodity prices and falling in mining investments, the Reserve Bank of Australia (RBA) cuts the official interest rates to historical low of 2.25% from 2.5 % on 3 February 2015. In my opinion, it was too early action.
My view is based on several factors;
- The surprise drop in the unemployment rate to 6.1% in December 2014.That means the labor market is moving. The ANZ Job advertisements series, along with the NAB’s respective employment indices have all been moving higher for some time.
- The drop in oil prices should help consumer sentiment and spending. Although Australia is a net- energy exporter (coal and LNG), we are a net-importer of oil. The fall in petrol prices flowing from lower oil prices has so far cut the average Australian household’s petrol bill by around $14 a week, therefore, $728 a year.
- Increasing growth in non-mining sectors of the economy; dwelling construction – demand for new homes especially for units remains solid -, tourism, higher education, agriculture and manufacturing are likely to see a boost.
- A weaker $AU.Because of arise in the value of the $US in response to relatively strong economic conditions in the US, and drop in commodity prices mainly plunge in iron ore price, the dollar is rapidly falling towards the RBA’s preferred US 0.75 cent level, which should have reduced pressure for a cut in official interest rates.
A weak $AU should help to boost sentiment among trade-exposed industries, which will provide a partial offset to lower commodity prices. Depreciated $AU makes the Australian produced goods and services more competitive in global markets. This should be a plus for investments, job creations, and federal tax revenues. Beside this, weak $AU will attract more international tourists, and international students for their high education in Australia. This again will help businesses’ bottom line and increase in employment.
Thus petrol prices and $AU are already doing part of the RBA’s job for it, leaving interest rates steady for now would have leaved the RBA better flexibility to respond more forcibly to demand weakness later should that be needed.
However, as the official interest rates drop to historical level of 2.25%, $AU will depreciate even faster. That should help trade-exposed industries, encourage businesses to spend more if possible to expand, and stimulate the housing industry a bit more.
But we know that household debt is actually Australia’s biggest economic problem. Surely, making borrowing even more attractive by cutting rates is not, therefore, the solution.
In the meantime, this decision will deteriorate the returns from cash and bank deposits for those who hold their savings and retirement income in those accounts.
On the other hand, if banks pass on the RBA’s the interest rate cuts to their mortgages’ interest payments on their loans then mortgages benefit from this decision.
Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.” Follow Halle on Twitter @halleyilmaz