Why we really don’t want another interest rate cut

Were you hoping for a cheeky little Christmas bonus in the form of another interest rate cut this week?

The Reserve Bank of Australia met yesterday and as widely expected, they did not cut the cash rate again – and it would not have been a cause for celebration if they did.

Hear me out here! I know the idea of another 0.25% shaved off your mortgage seems like a really good idea.


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But, here’s the thing. The cash rate is currently at a historically low rate of just 0.75%. This follows three interest rate cuts in June, July and October this year – something we haven’t seen happen since the GFC.

The Reserve Bank made these big cuts in the hope that people would become more confident about the economy and more confident about housing and therefore, they might start spending a little more freely and push that pesky inflation rate up.

Unfortunately, that’s not quite what has happened. So far, the response to shaving three-quarters of a percent off interest rates in just five months has been muted, at best.

So what’s next?

Well, there is still every chance that interest rates will be slashed once again in February.

If you’re a mortgage-holder, it might seem like a great way to start off the new decade. But if that happens, it means there is something deeply wrong with economy – as in, it’s tracking in the wrong direction.

Property prices have begun to rebound this year, but if that isn’t enough to increase consumer confidence and therefore, prompt more people to spend money and drive that inflation rate up, then the economy is going to stall.

The case for another interest rate cut in February or March next year will depend on the housing, construction and economic data that comes out over the next two months. And the truth is: we don’t want another rate cut. It’s not a good sign.

All of which means, if you jump on the Christmas sales, plan an Aussie holiday and generally spend with gay abandon over the silly season, then that may help to get the economy moving.

It would be un-Australian not to spend money, and you’re doing the country a favour by shopping. If that doesn’t give you enough of a green light to treat yourself this Christmas, then nothing will!

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