Like most people, I thought that the 0.25% interest rate cut announced by the RBA at 2:30pm last Tuesday was a good thing. Until I sat back and thought about it.
You see, as a mortgage broker, anything that stimulates the property market or refinancing of existing loans is a good thing. There’s nothing like a rate cut that achieves these things. So all is good then. Business should be booming.
There’s just the matter of why interest rates are being cut that worries me. Stick with me for a few paragraphs while I attempt to make my point.
For the past 14 months I’ve written ad-nauseam about our stagnant income rates. People’s incomes are just not going up at the same rate as prices (that’s asset prices or the price of everyday goods). What’s happened now is that for a couple of quarters we’ve had low inflation. Mainly because the growth in people’s incomes (or lack of it) simply could not keep up with the growth in prices. So prices have stagnated.
So falling rates are a symptom of a poor economy.
Our economy has been struggling for 8 years now and the main cause was the GFC. Which didn’t have the same impact here as it did in the rest of the world. Now though, we’re feeling that impact. We live in a global economy and the ails of Europe and the US coupled with the bust in commodity prices have finally caught up with us.
So it’s all bad news then? Well, not really.
We were at the peak of commodity prices a few years ago and hopefully we’ve now bottomed. Who knows where they’ll head from here. Let’s be optimistic and assume they will start heading up.
The key economy for us (and the rest of the planet) has always been the US. Yes, China’s important but it’s economy is also dependent on the US (as well as Europe). China has been trying to turn that around by relying on a domestic (consumer led) recovery – which has yet to materialise in a meaningful way.
When the US recovers – and it has been a very slow recovery – expect China to also recover. Europe? Not so sure as they have some political and structural issues to tackle before wishing for a miracle. History tells us that trying to get the Europeans to agree on anything will be difficult. Even if they do agree it will be so compromised you will end up with an unworkable policy. Much like the Eurozone.
There’s also the X factor. The thing you weren’t expecting that impacts the economy. My view is that, this X factor will involve either India or China in some way and that it will be positive for the global economy.
The X factor can also be negative. This could be some kind of political or military conflict that we weren’t expecting.
If the US and Chinese economies start to hum then we will see a correlating improvement to our economy.
The down side to all of this will be an increase in interest rates. Phew, it took a long time to get to that point.
An increase in interest rates is a good thing. Here’s why:
• Incomes should be on the increase as the demand for labour creates price competitiveness amongst businesses (for human capital). Put simply, your skills will be in more demand and it’s likely that your pay will go up.
• The Government’s tax take will increase. This relieves the pressure on the need to increase taxes.
• The Government’s need to pump expenditure into the economy will decrease – this should be replaced by business. This will provide a double whammy (in a positive way) to GDP and the budget.
• If you rely on Term Deposits…enough said.
Obviously, your mortgage repayments will increase. But what would you prefer? Your mortgage rates going up by 1% and your income going up by 5% or the status quo.
So, when headlines try and scare the proverbial out of you with mortgage rates going up (some time in the future), think about this article.
Oh, and by the way, this will happen, I just don’t know when it will happen.