The Sydney-based Reserve Bank of Australia cut the official cash rate from 4.25% to 3.75% last Tuesday.
The Sydney-based Reserve Bank of Australia cut the official cash rate from 4.25% to 3.75% last Tuesday. File

Rate cut should boost spending

THE surprising half-percent official interest rate cut last week by the Reserve Bank of Australia highlighted the different faces of interest rates.

Firstly the good news - if the interest rate cuts are passed on in full by all banks, a $300,000 house or business mortgage will see repayments decreased by around $100 per month.

This further means that household discretionary spending will increase, perhaps resulting in increased retail spending and property improvement spending.

This additional spending then has a flow-on effect of boosting economic activity in all sectors of the economy.

The other good news to some people is that the interest rate cut results in a lower Aussie dollar as the currency is less attractive to investors at reduced rates.

This in turn makes exporters' lives a little easier as they will receive a higher international currency equivalent for their product.

There is some bad news, however. International travellers receive less value for their travel dollar overseas and importers pay a little more as a result of the reduced interest rates and subsequent reduced Aussie dollar value.

Another downside is that the significant decrease in official rates as announced by the RBA last week means that the Australian economy overall is not travelling too well.

A reduction in interest rates is a key tool for the RBA in attempting to stimulate spending in the economy as a result of existing sluggish conditions.

On balance, one would have to say that the positives outweigh the negatives as an interest rate reduction makes lives easier for businesses and families with mortgages to pay.

Also, while the drop in the Aussie dollar has a negative impact on some, the offsetting advantage of stimulating the overall Australian economy would have a positive impact on many more.

Whichever is your situation, be thankful that the ugly times of interest rates are not in place now as they were in the late 1980s for those old enough to remember.

Rates of near to 20% made life very difficult for mortgage holders and it is no coincidence that a major recession (and the last technical recession experienced in Australia) followed in 1990.

 

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