Economy

Aussie Interest Rate Cut Again

July 3, 2019
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OK, so about a minute ago I went on to type out this post and the entire FrugalSamurai site had a “fatal error” message… to say that my heart skipped a beat is to put it LIGHTLY.

Too much blood, sweat and tears have been poured into this project for it to succumb to some Machiavellian cyber-attack.

“DON’T YOU DIE ON ME” I yelled at the monitor, pounding my fists on the desk, willing it to BREATHE.

Takes a huge breath.

Be still my beating heart.

Too much excitement for a Wednesday night I tell you.

Anyway moving on.

So, our central bank, The Reserve Bank of Australia (RBA) once again cut the official cash rate this week to a new record low of 1.00%, following on from a previous cut of 0.25% last month.

When it rains it pours in the corridors of power it seems, as it marks the first back-to-back cuts in 7 years.

Why did they do it?

Because they can OK – if RBA Governor Philip Lowe wants to cut our headline rate between lunch and afternoon tea, you better believe he will.

“I didn’t work in banking for over 30 years to take advice from the likes of YOU”, you can almost hear him saying.

I’m sure grandiose illusions of power runs THICK when you’re at that level.

But the “official” (translated: boring) reason is that frankly, our Australian economy ain’t doing too well.

Following on from last month and its implications (read my earlier post on it here), by cutting again, the RBA is continuing to address their second mandate being “the maintenance of full employment in Australia…”

(Under)employment

Whilst the current unemployment rate at 5.2% is near an all-time low (that’s good!) the RBA wants to reduce those of us who identify as wanting more work/hours than they currently have (oh, that’s bad).

A term labelled as “underemployed”.

For example, Bill currently works 15 hours a week as a human cannonball but wants to work 40 hours. Bill is a member of the “underemployed”.

Currently, the underemployment rate sits at 8.1%, which translates to over 1m people.

Of these, those aged 15-24 make up over 300k, in part due to the increase in part-time employment, casualisation of the workforce and the rise of the “gig” economy.

In other words, many younger people are struggling to work enough hours to meet the costs of living (c…can I go now).

So what?

Well, they had to do something right?

If you dig into their latest statement released after the cut, the RBA stated that the outlook for the global economy remains “accomodative” (I’m thinking they’re about to embark on a tax-payer funded tour around the world?) and the economy is being weighed down by low consumption growth, benign wage growth and minimal inflation growth.

However there’s only so many levers which they can pull; and that’s where our government needs to step in to introduce measures to stimulate the economy hand-in-hand (which they are starting to do).

Short-term

However in the immediate future, the market is pricing in about a 40% chance of another rate cut before the end of the year, which would take it to an unprecedented low of 0.75% – crazy stuff!

Confidence!

Some good news though among the gloom is that the latest consumer confidence survey shows that people are generally happier than they were last week (+4%), which is curious to see, as I only feel about 2.5% happier.

Confidence is key – in life, in communication, and in setting interest rates it seems.

The more confident we are, the more we are inclined to spend money and hence better the economy.

Related image
Level 99: Supreme confidence

Final Thoughts

I still hold the belief that these latest round of cuts come about 6 months too late from when I first mentioned them (here).

Given all that’s going on with high asset valuations, peak overseas economic growth and global macro head-winds, it just means that there is one less weapon in the RBA arsenal to ward off any upcoming down-turn.

Mind you it’s going to be good news for our stock and housing markets – as long as credit policies are loosened to entice further borrowing.

Also, you’d expect the RBA to be watching the effects of their rate cuts like a hawk in the coming months, to see whether they have worked out as planned.

And on a final note, our principal + interest repayment strategy on our property loans are doing just dandy too – GO BABY GO.

Now I’m off to find some website PROTECTION. Goodness gracious.

What do you think? Did you enjoy this post? Please help me out if you enjoyed this and put your email in and click on the little “subscribe” button at the top right. This way, you’ll never miss my words of awesomeness! So do the right thing, be a subscriber and get it straight to your inbox fresh out of the oven!

P.S. If you want to understand how an interest rate cut affects you, then have a read of my previous post here: https://thefrugalsamurai.com/2019/06/09/the-rba-cut-interest-rates-so-what/

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