Cash Rate Declines- Consumer Sentiment Unlikely to be Impacted

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Today the RBA has reduced the cash rate by a further 0.25% down to 2.25%. This is on top of already easing household pressures through fuel costs and food. Whilst there is often talk about interest rates providing inflationary pressure for residential property, the reality is that the correlation is quite weak. Of more concern for the policy makers and financiers should be what happens when the interest rates start to increase. With 50% of all home loans being to the investment sector, gearing ratio's will need to be monitored, particularly in areas where an oversupply is expected with rental incomes anticipated to decline in the short to medium term.

The question remains though, will interest rates stimulate the economy? The position of the NPR Co. is that it is unlikely. We suspect that the majority of savings will go towards reducing debt, thereby not actually contributing much to the economy. In a recent tweet, we stated that "Australia has a confidence and leadership vacuum at present, not an interest rate problem." Consumer sentiment is flat, retail spending is flat, job uncertainty remains a concern, the ASX is trading sideways for all intent and Federally, as well as in many States, the leadership leaves a lot to be desired. 

This could not have been more evident than the recent Queensland elections. If you want to fix the economy, the public need confidence in our leaders. With already low interest rates, one has to question whether this is the problem or whether there is something considerably more fundamental at play.

At an international level, it is acknowledged that the cost of our commodities have declined. A lower Australian dollar will continue to support those export industries and make them more competitive. However if recent trends are anything to go by, fewer employees seem to be doing more of the work. Again there remains a question mark over whether a 0.25% rate fall will change this outlook, at least in the short term, we suspect not.

Whilst it is encouraging that consumers will on the whole benefit from lower mortgage rates, we remain unconvinced that the root of our problems is an economic one, rather than one of poor confidence. Let's hope we are wrong and that the interest rate reduction does put a spark back in our economy and confidence. A buoyant Australian economy benefits everyone and allows governments to be less frugal in their plans. Tourism should continue to grow, our agricultural businesses should improve and hopefully our broader economy picks up on increased consumer spending.

If for a month or so the media could highlight the positives of Australia's natural and intellectual advantages rather than speculation over leadership challenges, most Aussies might for a moment believe that everything is okay...and from that point, we have a real chance of turning around this negative and self-destructive bender.

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