Why The Cuts?

The RBA is all too aware of the implications on the housing market of a sustained low interest rate environment.

The excessive, loose monetary policy implemented in the US during Alan Greenspan’s tenure and their current housing market condition is testament to the pitfalls of this. Excessive growth and supply were the results.

Currently, rates are at near emergency levels seen during the height of the GFC. But the RBA says that the economy is growing close to trend, unemployment is close to its natural state and investment is tipped to remain strong over the coming years.

So why the cuts?

The RBA consistently cites global uncertainty as a reason for its recent rate cuts. There is no doubt that we are in uncertain global economic conditions, and with continuing pessimism about Australia’s vulnerability to a ‘China hangover’ or the end of the decade long resources boom, low rates can be expected. These reasons are clear (while not entirely valid), but other less obvious ones exist.

There is considerable media attention on the obsession to bring the budget to surplus. Many cannot understand why this would be desirable given the global uncertainty, thinking stimulus and not belt-tightening should be the answer. According to finance minister Penny Wong, bringing the budget to surplus gives the RBA room to cut rates FURTHER. This is because interest rates and the Australian dollar are needed to manage the economy if growth were to deteriorate.

But Australia’s status as an investment ‘safe haven’ has kept the dollar in its elevated position, which is ultimately forcing the RBA to push rates down to emergency levels when there is no crisis in Australia.

The current situation is therefore the result of the difficulty in managing a resources boom without letting important arms of macro-economic ­policy – in this case the budget – get out of control.


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