Every month, the financial markets whip themselves into a frenzy about the Reserve Bank of Australia’s (RBA) decision on interest rates.
And you’re over here like ‘how long is that Hiddleswift thing going to last?’.
So, should you care about interest rate cuts? Yes and no. Let me give you a quick run-down about interest rate decisions (aka monetary policy) and you can decide. Or you could just sound smart and knowledgeable. (Although this is a simple version; the economic theories behind monetary policy are hectic).
- Have a mortgage? Happy days. You’ll save a few dollars a month (say $50 on an average mortgage), which the government hopes you will spend elsewhere, propping up economic growth. However, the tight-arse banks are only passing on half that cut, so don’t start booking the trip to Vegas yet. Also, you could just keep paying your existing amount, to pay your mortgage off faster and save on interest.
- Want to buy a property? Not ideal. Low interest rates do make loans cheaper, but they also tend to raise property prices. Everyone is all like ‘yay, cheap loans, let’s buy!’. But when everyone does that at once, supply and demand get out of whack. Next thing you know, someone pays more than a million bucks for a hovel in Surry Hills where a dead body was found. True story.
- Going overseas? Probably doesn’t matter. In theory, these decisions affect the strength of the Aussie dollar. It fell a tiny bit today, which is normal. But because other countries’ central banks* are all over the place right now, it’s hard to predict what will happen to the currency. It’s really complicated, so let’s just say this: if you’re travelling, just travel and hope for the best.
- Running or starting a business? Mostly a bad sign. If you want a business loan, it will be marginally cheaper due to lower interest rates. But the big issue here is what low rates tell us about the economy. Put simply, it’s kinda crappy. Inflation is low, meaning we aren’t getting mad payrises or spending up big. The economy is growing, but not fast. Consumer confidence is ok but could be better. So the RBA cuts rates to ‘stimulate’ the economy.
But this doesn’t always work. It’s like when you’re a kid and you get ten bucks from your Nanna. You can go spend that on mixed lollies and bouncy balls (the kid version of hookers and blow), or you can save it in your Dollarmites account. Unfortunately, we have too many Dollarmites and not enough child-gangstas these days. The RBA says spend, don’t save! But we don’t.
So monetary policy isn’t working very well, either here or around the world. You might think all the smart money-type people (e.g. the central bankers) would have come up with a Plan B by now. Afraid not.
Well there are other solutions like changing our tax system, cutting the Budget and other politically unpalatable ideas, but it takes a bold government to change what we call ‘fiscal policy’. So they just leave it to the independent central banks to make the hard calls on interest rates.
So there you have it. I’d say you should care about interest rates in the way you care about the love life of Taylor Swift. Interesting but marginal to your daily life.
* A central bank is an independent body that sets interest rates (among other things). They aren’t like normal banks and politicians mostly can’t tell them what to do. So if you hear about the US Fed, the European ECB, the Bank of England or the Bank of Japan, they are central banks. Don’t go ask them for a car loan.