Originally published by Chamber of Merchants
The RBA has kept interest rates on hold 1st November 2016. See my reasoning below on why a rate hike would have been to the economy’s short term benefit.
Great… Our GDP is going to love this. Our exporters too. Next quarter GDP won’t be very pretty.
AUD/USD Exchange rate chart after RBA holds interest rates.
(Rate cuts in general are a pretty bad idea when demand side growth is waning, but based on our inflation targeting system I make a case for lowering rates to avoid, what I believe, is Australia’s impending recessionary cycle.)]
Introduction
Let’s all do a group hug and agree that raising interest rates is off the table. Not only is the Australian unemployment rate concerning while being under reported, but our inflation is anaemic (are low prices bad?) and the strong currency is hurting Australian imports.
With the current economic numbers Australia could be heading for recession and one would think the RBA is aware of that. So there is no risk of an interest rate hike.
At the same time, keeping the interest rate the same will likely keep the Australian Dollar too buoyant which would slowly but surely reflect in our diminishing current account deficit and a lower GDP as our exports achieve lower returns from overseas buyers.
According to the monetary policy system that rules our modern world, for better or worse, Australia would benefit from an interest rate cut.
An rate cut would boost consumer sentiment, acting as a tax relief on those who pay mortgages and loans. It would also act as an investment incentive as money becomes easier to borrow and service.
Risks
Unfortunately as we’re seeing in the United States, lower interest rates lead to bubbles which are unsustainable in the long term.
Low rates for longer holds off the necessary correction an economy must experience in order to restructure for future growth.
Another risk is that our banking sector is unlikely to pass on the full weight of a hike, making the cut ineffective to begin with.
So Philip, I’m glad I’m not in your shoes. For now, the general population isn’t aware of a possible recession.
In fact, in a 25 year period of avoiding a recession, we have an entire generation that has no idea what it is to face large scale unemployment.
Proactively, cutting interest rates would be beneficial in the short run. In the long run, we’re heading for the part of the cycle that no one remembers exists.