With the Reserve Bank of Australia cutting the official cash rate to a record low of 1 per cent, interest rates continue to be the talk of the business pages. But do rates this low pack a monetary punch? Or will the Government have to pull on the fiscal purse strings to get the economy moving, as RBA Governor Philip Lowe is encouraging?
Let’s have a quick look at what it might mean for businesses and households.
Let’s get spending
The Reserve’s decision to cut rates is motivated by one thing: to get businesses and households spending. The RBA has its eye on last month’s uptick in unemployment and is trying to cut it off at the pass. But consumers are nervous. Many might be tempted to reduce the record levels of high household debt rather than spend it at the tills. Falling house prices aren’t helping that sentiment – although there are signs the bottom is near.
The biggest beneficiaries of low interest rates are mortgage holders, and there is a strong correlation between low rates and house price rises. But the cooling is not yet complete. While first home buyers might get a look-in, investors are unlikely to pile back in – especially with an apartment oversupply that could take up to two years to clear.
In any case, low interest rates are no use for borrowers who can’t get credit. Tightening lending standards after the Banking Royal Commission look set to be loosened, but these have yet to flow through to consumers.
The Reserve hopes that lower rates will get businesses to borrow, spend and expand. That’s good for employment. But interest rates are only one factor, and a mixed economic outlook is weighing heavier on business sentiment. In any case, businesses can always dip into retained earnings.
It’s not all bad news though. High commodity prices are encouraging miners to spend on capex and the infrastructure pipeline looks strong in NSW.
Low rates mean better cash flow for business and household budgets. It makes servicing debts lower. But the question remains if householders will use the cut as an opportunity to build a repayment buffer and keep their payments steady.
Businesses may choose to boost dividends or retain earnings.
With debt this high and rates this low, you have to wonder if the monetary policy instrument might be a little blunt on this one.
Asset prices and the Aussie
When rates are this low, deposits may flow into shares or commercial property – leading to higher asset prices. The wealth effect means that people feel wealthier and are therefore more likely to spend. The RBA hopes so.
One other positive flow-on effect is the lower Australian dollar. A weakened Aussie will have positive impacts for exporters.
Where to from here?
The Government will need to pitch in some infrastructure dollars to get the economy moving along. Tax cuts are scheduled to be passed in early July. But whether consumers will do the patriotic thing and spend, spend, spend will mean the eyes of the RBA will be glued to retail figures.
It looks like both the RBA and the Government will have to do some heavy lifting in concert, but meanwhile, now is the perfect time to take advantage of our low, low, low interest rates and finance your expansion.