Do we really need a rate cut?

As another month goes by and the interest rates remain the same, some sections of the media are calling for interest rate reductions. We should be very careful what we ask for given that there is absolutely no guarantee that the banks will pass on those cuts to the RBA Cash Rate. Some important things to consider if the rate was cut. The Australian Dollar would likely push through the US0.70c barrier. As a result, the cost of fuel would increase, the cost of imported goods would also escalate and quite likely your cost of living would burn up any savings that the average mortgage would likely reduce by. The cost of an overseas holiday would go up, but our inbound tourists would find Australia even more attractive. Our manufactured products (of which there are fewer compared to two decades ago) and our resources become cheaper on the world stage. Most international debt would escalate for the country.

The above two graphs demonstrate that there has been a property correction and that it is well underway. However the impact on household's net wealth has been moderated to some extent by moderate performance from other financial assets. However the impact of a house correction has been felt most notably in Sydney. Melbourne and Perth, which must surely be approaching the bottom of its cycle. However Adelaide and Tasmania are in an upswing and Brisbane remains largely stable. The narrative is largely Sydney and Melbourne focused with clickbait headlines.

With the Reserve Bank having just 1.5% to play with before the cash rate hits zero, the use of any cuts needs to happen sparingly and with absolute confidence it will make a difference. Fortunately our RBA tends to be run by very clever people that do see the bigger picture...but somewhere between the RBA's front doors and the media self interest promoting doom and gloom, the average punter whilst a little weary from all of the negativity, is actually going along pretty well.

Matthew Gross | Director | [email protected]