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Ross Greenwood

Ross Greenwood Blog

Interest rates on hold decision sends mixed messages

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The Reserve Bank today tried to keep a bit of its powder dry. But by keeping interest rates on hold it is sending mixed messages to the community, and to financial markets.

November is typically the time rates move because it sends a clear signal about the expected spending behaviour into Christmas. Now people and business may be uncertain. Should they spend, or save?

The RBA says the impact of previous rate cuts (and they are not unsubstantial, 1.5% in the past year) will still filter through the economy. But the Reserve Bank understands there are tougher times coming … and this is where the mixed signal start and finish. Interest rates typically fall when things are going badly for a country.

Yet do things really feel that bad? The idea is that rate cuts stimulate demand and stave off economic erosion. Yet listen to Government finance ministers and they would have you believe the rates are being cut because we’re one of the great economies in the world. So which theory is right?

Though the Government argument plays to the electorate – because lower interest rates feel good in the mortgage belt – they are the people being stimulated to spend after all … the mere fact that they require stimulation means something is wrong elsewhere in the economy.

And what’s wrong is the mining industry, with taxation revenues falling heavily yet the high dollar continuing to push up their costs. As a result all mines are becoming less profitable (hence the lack of Mining Resource Rent Tax in the last quarter) or are unprofitable (witness recent mine closures, with forecasts of more to come).

Without the revenues being generated by mining taxation, the Government needs other parts of the economy to pick up to create profit and tax revenue. It’s for this reason the Reserve Bank has had to move fast. If it did not there would be a big hole in a Budget that was already taking money from the economy.

The other point that should be remembered is that in the quest to reach a surplus in 2012-13, (forgetting, as the Goverment wants you to, the $25 billion blow-out in the 2011-12 Budget deficit) it has changed company tax payment arrangements from quarterly to monthly, in the process ripping another $5 billion or so out of the economy next year.

That impost is a handbrake on the commercial sector that will require another response from the Reserve Bank to keep economic growth motoring along. And so you have another reason for more rate cuts in the future.

It seems inevitable. The pressures are mounting in the economy.

And, for a change, making consumers, property owners and business owners happy is the immediate solution to the problem. Enjoy it while you can … there is no guarantee it will be a permanent state of affairs.

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