Once again, the news cycle is filled with speculation about whether the Reserve Bank will cut interest rates next month.
This raises a couple of questions.
1. Why all the noise?
2. Why should you care?
The noise – or economic commentary – is partly because the signs for a rate cut are unclear.
Many indicators, such as low inflation and sluggish economic growth, suggest cutting rates is a no-brainer. However, most economists thought the same thing last month, but rates were left on hold.
Australia is certainly facing some economic headwinds at the moment. For example, the price of one our most important commodities – iron ore – has fallen, meaning less income from our trading partners (especially China) and less tax paid from royalties. It has also wiped more than $74 billion off the value of listed mining companies on the Australian Securities Exchange.
However, some trends – in particular, the resilience of the job market – could stay the hand of RBA Governor Glenn Stevens.
Moreover, rates are now so low that any downward move shifts it into ‘historic’ and ‘record low’ territory. This makes everyone a little nervous: not only does it send a message about the state of the economy (i.e. it’s on struggle street), it also increases the risk of a housing bubble, as mortgages are so cheap.
The bigger picture
So, should you care? Absolutely. Even if you don’t have a mortgage, interest rates are important. I won’t go into an economic treatise here (since I am not an economist) but a couple of reasons are:
Interest rates drive business investment: when rates are low, businesses are more likely to invest in loans that can help them grow. This activity flows through to job creation, wages growth and overall economic awesomeness.
Interest rates have a psychological impact: people tend to feel wealthier when their mortgage repayments are lower and their house is worth more (since low interest rates drive property prices up). This cashed-up feeling feeds into consumer confidence, retail spending and lots of other good vibes that keep our economy firing.
So, if it’s good economic vibes you like, perhaps you should cross your fingers for a rate cut next month.