Why the RBA cash rate meetings are like Schrodinger's cat experiment

?The Reserve Bank of Australia's monthly cash rate meetings have taken on an aura of unpredictability akin to Erwin Schrodinger's famous thought experiment on quantum superposition.

In the cat analogy, Schrodinger imagines a scenario where a cat locked in a box with a radioactive atom could be considered both dead and alive until the box is opened, and its state observed. Prior to observation, the cat exists in a state of uncertainty.

Similarly, ahead of each RBA meeting there is a cloud of probability on whether interest rates will rise, fall, or remain unchanged. Economists, market commentators, and media speculate endlessly, but the outcome remains unknown until declared.

This uncertainty has intensified since 2022 as inflation pressures build globally. The RBA has already raised rates several times, taking the cash rate from a record low 0.1% to a 10-year high of 4.35%. But will the tightening stop there or continue? No one really knows.

Just as Schrodinger's cat is neither dead nor alive pre-observation, the RBA cash rate pre-announcement is neither rising nor falling - it exists in a state of superposition. Only when the meeting concludes, and a decision is announced does the rate become "observed" in one state.

This interest rate uncertainty is no mere thought experiment. Mortgage holders anxiously await each monthly RBA meeting, hoping the box does not open to a world where they cannot afford repayments. Entire industries hold their breath, wondering if demand will shrink.

While economists can advise probabilities, the final decision remains elusive until revealed. The RBA board members are like Schrodinger, holding the power to collapse the wave function into a single outcome.

So, as we approach each RBA meeting, remember that interest rates, like quantum cats, remain in suspended reality. But eventually the box must open, and we will observe its state.

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What does this mean for the economy?

The superposition-like state of not knowing if rates will rise or fall makes it difficult for businesses and consumers to plan spending and investments. This can lead to hesitation in making major purchases or hiring if the economic outlook is unclear.

Prolonged uncertainty can also hit consumer and business confidence, further dampening economic activity. People may save more and spend less to brace for potential rate hikes ahead.

For industries sensitive to interest rates, like housing and car sales, demand can fluctuate wildly as buyers rush to make purchases before expected rate rises. This volatility makes it hard to make sound business plans.

On a macro level, the RBA cannot perfectly control the economy when businesses and consumers are reacting unpredictably to policy uncertainty. It becomes a guessing game on how rate changes will play out.

So in many ways, Australia's economic fortunes remain in a metaphorical box, hovering between states until the RBA's observation collapses the probabilities. Greater clarity in signalling and forward guidance could open the box earlier and provide stability.

In the meantime, all we can do is speculate on economic Schrodinger's cat. The outcome will only be known when the next RBA meeting concludes.

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What can home loan borrowers do?

Borrowers should be prepared for either outcome of the RBA meeting.

Here are some steps borrowers can take amidst the interest rate ambiguity:

• Fix part of your loan - Consider splitting into part variable and part fixed rates to get some certainty on repayments. These balances managing unpredictable rises while taking advantage of potential falls.
• Maintain a buffer - Having some spare funds or room to tighten budgets allows more flexibility in absorbing rate changes. Avoid more borrowings and overextending finances.
• Review product options – Your mortgage broker may have products that offer benefits like offset accounts and rate switching flexibility to take advantage of rate changes.
• Monitor closely - Follow RBA announcements, economist views and general indicators to stay informed on where rates may move. But take any predictions with caution.
• Model out scenarios - Do some hypothetical calculations on the impact of further rate changes for your situation. This allows better financial preparedness.? This is where your mortgage broker can help you calculate your repayments.
• Have contingencies - Be open to options like consolidating debts, extending loan terms or switching lenders if repayments become unmanageable.

While the RBA's "box" remains unopened, borrowers can take sensible steps for either outcome.

Talk to your mortgage broker who can provide you with the right advice.

Mindful preparation and flexibility will go a long way in navigating interest rate uncertainty.

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Disclaimer:

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