I’m sorry to be the one to break it to you, but I very much doubt that this small cut in interest rates will be the circuit breaker everyone from Treasurer Jim Chalmers down has been hoping for. After our many months of longing for this moment, such a modest saving can only be an anticlimax.
I doubt this will be the reason the economy begins to recover as we all go out and shop. Nor will it be the sea change that secures another term in office for Prime Minister Anthony Albanese.
Consumers and voters are in a sullen, sour mood and have been for a year or two. We’re feeling so sorry for ourselves it will take a lot to lighten us up and make us forget our obsession with the cost of living. Even if things improve, our negativity may lift only slowly over many months.
Normally, a change of government would help a lot. New leaders get a honeymoon in which hope springs eternal. The taller and better-looking the new guy is, the better their chance of making a good impression.
But it’s hard to see a man whose specialty is making us feel angry or afraid being the bloke to cheer us all up.
For someone with a mortgage of $600,000, a rate cut of 0.25 percentage points is worth about $23 a week.
Do you remember Chalmers’ tax cuts last July? No one was terribly excited about them. But they were worth $34 a week for someone on $84,000 a year, and $54 week for someone on $122,000 a year.
There may be more cuts to come this year, of course, even a possible two more before an election held in mid-May. But from what the Reserve Bank is saying, I doubt it’s in a tearing hurry to keep cutting.
And though the Reserve raised interest rates by 4.25 percentage points over the 18 months to November 2023, I don’t expect it to cut rates by more than about 1 percentage point, leaving the official interest rate at about 3.35 per cent.
Why? Because its 4.25-point increase brought the rate up from its crisis level of almost zero during the pandemic and its lockdowns. Now the Reserve will be getting the rate back to normal, not crisis territory.
And while we’re all feeling so sorry for ourselves, don’t forget this. Normally, by the time the Reserve starts cutting interest rates the economy is in recession and unemployment is way up.
Our economy is becalmed, but in nothing like a recession. Right now, we have a higher proportion of the working-age population in jobs than ever before. At 4 per cent, our rate of unemployment is lower than it’s been in most of the past 50 years. Sound terrible to you?
Indeed, it’s the remarkable strength of our jobs market that’s the main reason the Reserve has been so reluctant to cut interest rates until now, and remains “cautious” about cutting them further.
