RBA rate cut to historic lows to boost growth, is that really going to happen?

The RBA has cut the interest rate by 25 basis points from 1.75% to a historic low of 1.5% in an effort to stimulate the economy, specifically boosting growth and reducing the Australian dollar. Concerns have been raised about the subsequent effect that this will have adverse effects on the property markets. By decreasing the interest rates, many are worried that this may result in a further inflation within the property market. 

 

RBA governor Glenn Stevens has addressed the concerns that surround the Australian property market, stating that the banks themselves will be cautious in lending within the property market and hence solving this issue themselves. However, it seems rather callous for the RBA to leave the fate of the Australian property market and by extension, the Australian economy in the hands of four private institutions. Banks are allowed to have market power and they are allowed to make lawful decisions; they do not possess the same mandate to protect the Australian economy as the Government and the RBA.

 

 Inflation is substantially lower than the current 2-3% target in addition to this, low growth figures announced within the retail market places foreshadows another cut in the near future. The pressure is rising within the Australian economy. If the RBA was to drop interest rates again, their collars might be a bit tighter. Without the buffer room, they could fall victim in the hands of a liquidity trap. In addition to this, if Donald Trump was to win the U.S. election, it is forecasted that a major sell of U.S. dollars may occur. This would drop the rates of the $USD and subsequently push the $AUD even higher. A higher dollar means less exports, and a decrease in competitiveness within the global economy.

 

Even more alarming is the fact that the banks have not truly passed on the interest rate cut. The Big four banks have passed on about half of the cuts, keeping the rest for themselves. The stimulatory effects of the cut will not be fully realized as a result of this, and it’s concerning as this has been the trend over the last decade when considering interest rate cuts. The banks will have to explain their decisions in-front of the House Economics Committee. Unfortunately, this committee isn’t one that can enforce the law. It is the ACCC that must investigate whether there is a violation of market power.

 

We’ve seen this happen before. In 2012, the RBA held the rate at 4.25% of the cash rate, however the Big Four banks acted independently and increased the interest rate for the benefit of their own share-holders. With such a small cluster of banks deciding the Australian economy, it is worrying to think about the power that this financial oligopoly has. The Government seems to be extremely lenient on the banks and the statements made by Glenn Stevens support this as they consistently put the ball in their playing field.