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Do we need another rate cut city or don’t we?

Pushing on a string. piggy bank

There’s a general line of argument in Australia that goes something like: there won’t be any more rate cuts because we all know they don’t work any more (or something along those lines).

There may or may not be further cuts in this cycle, granted.

But where’s the evidence that rate cuts don’t work?

Below I’ve posted a very simple chart which tracks the unemployment rate in the US (4.7 per cent) and United Kingdom (4.8 per cent), against Australia (increasingly the outlier at 5.9 per cent).

pw1

Australia did well to avoid a technical recession through the financial crisis, partly thanks to stimulus in China pushing up the prices of coal and iron ore, and partly because pro-active Prime Minister Rudd moved swiftly to announce a series of stimulus packages.

Britain and the US have turned things around through zero interest rates and other unconventional measures, with the UK employment rate now surging to the highest level since comparable records began in 1971.

pw2

Strangely there have been few signs of strong price inflation to date.

Thunder Down Under

While other economies move towards full employment, in Australia we are grappling with oodles of spare capacity.

And this may get worse if what I am hearing from developers is right – that apartment construction is about to drop off dramatically.

The Reserve Bank of Australia (RBA) mandate includes delivering full employment, yet the youth underutilisation rate is as high as have ever seen.

pw3

Meanwhile, the inflation rate is also below the target range, so policy is arguably behind the curve. 

Wealth Retreat 2017 - Pete Wargent

And weak inflation may persist.

In its Bulletin this week the RBA noted some possible causes of ongoing subdued wages growth, including a shift to contract work (on-costs!), advancements in technological processes, and competitive pressures from the internationalisation of services trade.

All of which is a convoluted way of saying interest rates may yet decline further.

They may have to.

PW4



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Do we need another rate cut city or don’t we?' have 2 comments

  1. March 22, 2017 @ 10:51 pm Jura

    Even if RBA interest rates decline further, the big 4 may choose to ignore once again to decline their rates. Instead, the opposite happens, the banks choose to raise investor interest rates.

    Reply


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