That’s the thing about an interest rate cut. While business borrowers and mortgage holders will always welcome any reduction in borrowing costs, RBA governor Glenn Stevens’ post-cut statement contained a few worrying smoke signals.
Here’s Stevens on the mining boom:
“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
Here he is on employment:
“Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low. The Bank’s assessment, though, is that the labour market has generally softened somewhat in recent months.”
Here he is on China:
“Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”
And here’s his conclusion:
“At today’s meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”
Don’t you just love the use of the word “little”? It just sounds so…calm. A little slowdown here, a little more accommodative there, everything’s absolutely fine everybody!
World’s Greatest Treasurer Wayne Swan was quick to come out and welcome the rate cut news, but his opposite number Joe Hockey was waiting with a zinger – way back in 2009, Swan said that when rates hit 3% they would be at “emergency” levels, so surely the rate cut can’t be that welcome.
Dredging up stuff people said years ago is always a bit of a dirty trick, but Hockey does have a little point – the relief provided by the rate cut shouldn’t blind us to the fact that the economy is slowing, and no one quite knows what is coming after the mining boom ends.
The idea of the rate cut being less than welcome news was taken up by CommSec economist Craig James, whose research note following the rates decision carried the alarmist title ‘Rate cut: Will it help or hurt?’
James’ point was that not everyone is a borrower and rate cuts actually hurt the legions of savers in Australia.
“The number of savers has soared and currently deposits are creeping up to be almost neck and neck with loans. Deposits represent around 90% of loans outstanding, well up from 75% just five years ago,” James says.
But more than that, James asks whether the interest rate cut will actually stimulate spending. James is a part of a growing group of economists arguing that the impact of rate cuts is now muted.
“The $64 question is confidence. If people don’t have the confidence to spend and instead continue to save and pay off home loans at a faster rate, then the rate cut will have no impact on activity.
“It is also important to note that it is the level of interest rates that does the hard lifting work in the economy, not the change in rates. Interest rates are already below longer-term averages. And judging by what has happened in previous months, home borrowers are more likely to respond to a rate cut by paying off their home loan at a faster rate, rather than going on a spending spree.”
I hope James is wrong and this rate cut has set our retailers up for an improved Christmas.
But as he says, households need confidence and the undisputed key to confidence is job security. The RBA’s concerns about the softening labour market says to me that job worries will also stay high on consumers’ minds.
That means the impact of this rate cut could again be muted, and the RBA may well cut again in November.