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Howdy everyone!
All together for another rendition of TheFrugalSamurai?
You betcha!
Been a headline making week for us Aussies, it’s the first time our central bank (Reserve Bank of Australia) has moved the benchmark cash rate since August 2016.
With a cut in the official rate to 1.25%, this marks a historic low for our nation.
But what does it all mean?
In a nutshell, it means that the country ain’t doing so great, and that the powers-to-be decided they needed to do something to kick-start it.

You see, lowering rates should encourage increased investment and spending through cheaper access to borrowing.
How?
Well, in simple terms, lower rates:
Reduces the incentive to save.
Lowering rates provides a lower return from holding cash. This lower incentive encourages us to spend, spend, spend rather than holding onto money.
We might even bring forward spending by taking out cheaper loans to y’know, buy more stuff.
But the reward for keeping money in the bank decreases – that hurts our pensioners and retirees as they earn less interest on their savings held in their bank accounts.
Lowering mortgage repayments.
We’ve already seen our big 4 banks passing some or all of the rate cut onto their lending rates.
This reduces the monthly mortgage repayment, providing more disposable income for us to spend, spend, spend.

Cheaper cost of borrowing.
Lowering rates also lowers the cost of borrowing and further encourages consumers and businesses to borrow to finance spending and investment.
This translates into higher domestic production and creates more jobs.
Rising asset prices.
When our spending rises, demand for goods begins to exceed supply, so inflation starts rising.
Which makes buying assets like shares and housing a juicier proposition.
Hence you would assume a corresponding rise in those asset prices and therefore a rise in household wealth. The increased wealth encourages everyone to spend and invest more as consumer confidence rises.
Fall in AUD.
A drop in rates means it’s relatively less attractive to have funds in Australia, which reduces the demand for Aussie dollars, which translates into a drop in currency value.
This is because from a foreign investor perspective, it is a much better proposition to be investing in a country yielding higher returns elsewhere.
Although a falling currency is good news for exporters, because as the value of AUD falls, their customers (foreign importers) can buy more from them.
The converse is true for Australian importers (more expensive).
As exporters benefit, they ramp up production, which creates more jobs, which creates more wealth, which creates more spending, and so on.
~~~
It’s important to bear in mind that of course, as with everything – there is a LOT of external factors at play.
I’ve always taken the view that a cut in the official cash rate means that the underlying economy is not doing too good, no matter how positive the media or politicians spin it.
With all the talk of a global slowdown, it’s not like our domestic economy is coming from a position of strength heading into the next couple of years.
I’d argue that it makes our economy riskier, chiefly because there is even less wriggle room for our central bankers to play with if things really do hit the fan.
Which is why I’m hoping the RBA acted in time to fend off that dreaded “r” word.
Radiation?
Um no.
Recession.
Anyway, we’ll see won’t we guys… until next time!
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34 Comments
Oluborode Oluwatobiloba
Learning. Thanks for sharing.
The Frugal Samurai
Thanks for reading!
Danielle Jones
Interesting information. You seem to be very knowledgeable into this area!
The Frugal Samurai
Thank you for reading!
everdaylivinghacks
Yes! I love money hacks!
The Frugal Samurai
Hahaha don’t we all!
Pool Operator Talk
seems as though I have seen this plan B4 🤔 doesn’t have a great track record, hopefully this works for y’all.
The Frugal Samurai
Thanks for reading, and yes… you are referring to GFC with fed rate cuts ?
Ivan Jose
I quite enjoyed it. I understand the whole concept of lowering rates to encourage spending since I am a banker. There’s similar talk here in the Philippines as well.
The Frugal Samurai
Nice one! How’s the situation in over there? Economy going well I heard…
Sophie
This is a very informative and interesting post. Thank you so much.
The Frugal Samurai
No problem, thanks for reading.
amayszingblogs
Nice! Such a great information Money talks it’s really important 🙂
The Frugal Samurai
Yes I agree! Thanks for reading.
Neil Alvin Nicerio
Interesting information. First time I heard of this money saving scheme. Thanks for sharing.
The Frugal Samurai
No problemo, thanks for reading.
Suanlian Tangpua
Great post, its worth the read…”Cheaper cost of borrowing” nice subheading, very true!
The Frugal Samurai
Thank you! And yes, it is worth the read! Thanks for reading 🙂
Sanjota Purohit
Looks like you have great knowledge about investment. I was thinking about investing in MF fro long time but never had courage to proceed 😀
The Frugal Samurai
I know but a little! And yeah, what’s stopping you, find the courage!!! Don’t need to invest a lot at the start, but once you get going it’s kinda fun!
honeybunnytwee
Very informative and I’m excited to see how this plays out for Australia
The Frugal Samurai
Thank you, as am I!
blair villanueva
Something new information. I wonder if the Philippines also have this.
The Frugal Samurai
I’m not sure whether they would or not? But I’d be curious to know, keep me updated!
Nadj Villaver
I wish banks in PH also have these feature
The Frugal Samurai
Sigh, you think they would?
xo_adrienne
Never heard of this but thank you for the information ! 😊
The Frugal Samurai
All good! Thank you for reading 🙂
♡Stephanie Stebbins♡ (@stephsteb)
Awesome info. Thanks so much!
The Frugal Samurai
No worries!
colossalumbrella
Great tips! thanks for sharing… quite helpful in managing finances
The Frugal Samurai
No problem, thanks for reading.
Laithan
Great article Victor!
I love this Economics and Finance stuff as that’s exactly what I blog about too.
Do you think Australia would ever consider a negative interest rate?
Laithan
The Frugal Samurai
Thanks Laithan, glad you like it… loving your blog as well! Ummm… negative interest rates WOULD be very interesting but I would think that they’d do some form of QE before that. Never say never but I really wouldn’t want to see that, things must be REALLY bad then.