The growing concern for the Australian economy has lead the Reserve Bank Australia (RBA) to cut interest rates from 0.75% to 0.5%, in order to try stimulate some growth within the economy. This is in fact the fourth rate cut since June 2019 and the 7th since October 2015, sparking some doubt that the “monetary lever” may not be having a proficient effect on the economy. The Australian Government and the RBA are running out of monetary leverage, as two more 0.025% cuts will land the Cash rate at 0% – an event that has never taken place in the history of Interest rates in Australia.
Why is this concerning?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Monetary policy includes the manipulation of the Governments Cash Rate, in order to stimulate growth (lowering the cash rate) or to slow the economy if inflation becomes too high (increasing the cash rate). As the current Cash Rate is currently very low, it has made it cheaper to take out a loan as interest rates are lower. In the same effect, an increase in the Interest Rate will force people to save their capital in a bank and earn sufficient interest (in comparison to borrowing money). With such a low Cash rate, the Australian economy should be growing at a much faster rate than it actually is. The most concerning aspect is that inflation is still under the targeted 2-3% at 1.82%, which means that Monetary policy is not working as it should in theory. If you want to read deeper into the reasons why Australia’s Monetary levers are not working I recommend this article here.
It seems as though recently Monetary policy has been used less as an economic lever and more of a psychological instrument to reinsure the general public that our economy is “okay”. It is inevitable sometime in the near future, that Interest rates will hike back up to healthy levels. This would mean that the RBA would risk short term pain (slow down in the economy) for a long term solution to it’s failing monetary policy.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Tyger Fitzpatrick, Founder of Youth Investment Group.