The Reserve Bank of Australia is expected to lower interest rates by at least 25 basis points tomorrow, but will it provide any meaningful relief for householders? In practical terms, how effectively will it tackle the problems faced by low to middle income earners, such as cost of living pressures, falling consumer confidence and housing affordability?

Crikey asked four leading Australian economists for their views.

Saul Eslake, chief economist, ANZ Bank. The direct impact will be at the margins, although I think it will be helpful at the margin. The psychological impact will be bigger than the economic impact on household finances. Historically, consumer confidence has been quite sensitive to movements in fuel prices and interest rates, and the fact that both of those are moving down after an extended period of moving up will be helpful to consumer psychology. I’m pretty sure the RBA isn’t seeking to engineer a sharp turnaround in spending or activity. Rather, they are seeking to prevent an unnecessary and undesirable further weakening in spending and activity. That they will most likely go down .25 basis points, a view which is reinforced a) by last week’s business investment spending data which reminds us that there are parts of the economy which are still doing ok, and b) it’s now much more likely that the banks will pass on a rate cut in full than seemed assured four weeks ago. The need for the Bank to go further than a 25 basis points to ensure customers got at least a quarter would appear to have diminished.

Shane Oliver, chief economist, AMP Capital. Any rate cut will have a marginal practical impact. Twenty five basis points really just offsets half the rise in mortgage rates that the banks have passed on this year. Since January, they have increased their mortgage rates between .50% and .60% over and above what the RBA’s rises. A cut certainly helps and it provides a bit of optimism for the future, but the bulk of the stress that Australian households are under will remain in place. It’s a good confidence booster, but that’s on the hope that there will be more to come. The bottom line is the RBA will have to follow up with more rate cuts and the banks will have to pass them on for there to be a noticeable impact on household finances. In the short term the Australian economy will be fairly soft. And in my view, the move is a bit late. They shouldn’t have raised rates back in February and March. This is really just undoing the damage done earlier in the year. I think the risk of a recession has gone up significantly, and that’s obviously why the RBA has decided to move, but it could have been avoided by being a bit more cautious earlier this year.

Steve Keen, Associate Professor of Economics and Finance at the University of Western Sydney. What we are really being driven by now is the sheer scale of debt. We are now getting people turning from borrowing more money and spending it — which is really what has been delivering the apparent good economic performance of the last 15 years — to trying to reduce their debt levels. What the RBA can do to boost spending power by reducing interest payments on debt is nothing compared to what people are now doing by reducing the amount they are borrowing. That’s what’s starting to strike. And what we will see now is significant easing of the official interest rates for the next twelve months.

Professor John Quiggin, fellow in Economics and Political Science at the University of Queensland. You can look at the numbers and work out how much it is on half a million dollars of debt, and it’s not huge. But I suppose the big questions for the Bank is managing expectations. They are trying to head off the possibility of a steep and sudden downturn like we saw in 1989, and therefore a 25 basis point cut is a signal of more to come. You typically have a long cycle where cuts are made a bit at a time. On the other hand, it also shows they are not panicking. 50 basis points, which we had in the US a couple of times, would be saying we are panicking. There’s a big element of theatre of this. Whether you have 25 basis point now and 25 basis point in two months’ time is not going to make a lot of difference. But a 25 basis point adjustment now suggests a steady as she goes approach. The signal is, “We are not going to let the bottom fall out of the economy.”

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW