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Why cutting rates won’t spur on spending
Ahead of a possible rate cut, new research has found that lowering the official cash rate is unlikely to lift consumer spending.
Why cutting rates won’t spur on spending
Ahead of a possible rate cut, new research has found that lowering the official cash rate is unlikely to lift consumer spending.
The Reserve Bank of Australia (RBA) is expected to reduce the official cash rate from 0.25 per cent to 0.10 per cent when it meets on Tuesday, 3 November.
Canstar survey data has revealed that lower interest rates do not encourage Australians to spend, with only 6 per cent saying lower rates are a catalyst to spend in the next 12 months.
Instead, higher wages, improved savings interest rate and job security will get Australians to empty their wallets.
Canstar group executive, financial services, Steve Mickenbecker said a cash rate reduction is unlikely to have the desired effect.
“With existing home and business borrowers unlikely to see much of the cut and the former unlikely to spend it even if they do, the stimulus of a rate cut to the economy will be very modest,” said Mr Mickenbecker.
“Borrowing rates are so low already that a cut is largely irrelevant. Even if passed on fully, a cut of 0.15 per cent to the average $400,000 over 30 years will lower the monthly repayment by $33, not enough to make much of a difference to borrowers’ spending and house purchase intentions.”
Mr Mickenbecker said changes in the rate are “largely symbolic”, with banks able to get swap rates below 0.10 and the three-year government bond rate being 0.135 per cent.
The financial expert also pointed out that money spent in the economy from savers could disappear due to lower rates.
“Unfortunately the people who expect spending stimulus from increased savings rates will not see any joy, as the trend of rate cuts for savers is likely to continue. No bank is keen to put a zero or negative base rate into the market, but savers can expect further cuts to bonus rates and introductory rates.”
In 2020, the Reserve Bank has cut the cash rate by a total of 0.50 percentage point. Following is a snapshot, according to Canstar data, of what the banks and lenders have cut rates by during this time.
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