Today the Reserve Bank announced a reduction in the official cash rate of 0.25% from 2.25% to 2.0%. Whilst every reduction is genuinely appreciated, we are at the point where it is not making a significant difference for consumer spending.
My point is highlighted in the table below.
At best the monthly saving on the average loan for each state represents a carton of premium beer down to a standard pack of mids. Too put it even more bluntly, the savings work out to approximately one extra six pack a week. The beer economy at work? In all seriousness, the savings of between $10.00 and $13.00 a week on the average mortgage is hardly going to generate a windfall for the majority of households.
This interest rate reduction is not for the housing sector, despite the constant concern that it may fuel investment purchases. We are now at the skinny end of the rate cycle and if you couldn't afford an investment property before this rate reduction, you probably shouldn't be buying one now.
This interest rate reduction is more to do with growing business confidence and dropping the Australian dollar further to the benefit of commodities, agriculture and tourism. Business confidence remains low and we will continue to argue that this has as much to do with leadership in the public realm as it does with the consumer getting out there and spending more. At present, the consumer is typically looking at interest rates and working out how soon they can be out of debt, or at least make a substantial dent in their household debt.
This trend to debt reduction has been highlighted as a by-product of waning business confidence. When business doesn't invest, employees see this and join the dots. The GFC wasn't that far gone and some of the media continue to push a negative agenda that far from inspires anyone that may even think about a positive outlook. This doesn't help when Federal Budgets are treated as punching bags and the nation’s best interests take a back seat to common sense and economically prudent measures.
So forgive me if I don’t seem too excited about the interest rate drop. Sooner or later a line in the sand has to be drawn. Governments will have to invest in productivity gaining infrastructure. The blame game of “we have no money and the other party spent it” has to stop. Because every time that argument is made, the public and business keep taking their hands out of their pocket.
Enjoy your six pack!