You don’t have to be a ‘loser’…..
The Reserve Bank’s duty is to maintain “the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.”
It’s a big ask!
This month’s decision to cut the cash rate by 25 basis points to a record low of 2% would not have been an easy one. As with every judgement, there are trade-offs and unintended costs.
A simple model of the economy is that national income or the size of ‘the pie’ is the sum of all demand in the system, from consumers, business investment, government spending and the net result between what we sell to the world and what we import.
Economic prosperity requires a growing economy with the capacity to sustain and expand employment opportunities.
It’s not hard to see why a rate cut was not just welcomed by loan holders but necessary. Commodity prices have fallen, adversely affecting the ratio of export prices to import prices and business investment expenditure is weak in both the mining and non-mining sectors. When you add the tightening of the fiscal strings by Government and cautious consumers saving rather than spending, it was imperative to add some fuel to the fire.
With “spare capacity in the economy”, it’s hoped lower interest rates will provide further stimulus to consumer spending without the usual threat of inflation. Weak business borrowing and investment is the preferred target variable in the RBA’s sights.
So, why isn’t the latest cut ‘music to the ears’ of everyone?
It comes down to the fact that Monetary Policy is what’s referred to as a ‘blunt instrument’- interest rate changes apply generally and are therefore non-specific and often inequitable.
The record low cost of credit will encourage the important housing industry and the multiplier effect will be welcomed, but in Sydney and to a lesser degree, Melbourne, the stimulus isn’t needed – not in the resale market at least. Properties simply changing hands does little to stimulate production and employment the way new construction does but the Reserve has said it will work with other regulators to contain housing market risks. The unintended trade off and inequity of the interest rate cut is undoubtedly the ‘pay cut’ delivered to retirees dependent on income generated from cash in the bank – the ‘losers’ in this situation.
Cash is considered to be the safe alternative on the risk scale and many convert their assets to cash to avoid volatility in retirement. What they don’t count on is suffering ‘collateral damage’ for the sake of macro management and being forced to erode their capital.
It’s a good recommendation for holding property into retirement and generating income from rent rather than interest alone.
It will never be easier than it is now to start building or to grow a portfolio of properties that will allow you to reach retirement with a number of unencumbered assets generating reliable income.
You don’t need to be one of the losers….