Decision Day !

Here we are again, at the first Tuesday in a new month and that is when the Reserve Bank of Australia meets and decides that all important interest rate decision.  The pundits were hoping that the already dangerously low rate of  0.75 would be unchanged, but that was before the stock market made a calamitous correction and the Coronavirus showed signs of breaking out of isolation and raging on the world stage.

There are fears that later today the news will be that our interest rate has again been lowered and now stands at just 0.5%.  The thinking seems to be that a lower interest rate will deliver more money into the hands of people with home mortgages because the rate they pay will be lower and they will splash this money around to stimulate our sagging economy.

Each previous interest rate cut had exactly the same thinking and the end result was completely different.  The vast majority of borrowers simply applied that extra money into further reducing their mortgage and that predicted shopping bonanza failed to eventuate.  That is evidenced by the steady stream of restaurants closing their doors and the failure of clothing chains to maintain their previous discounted offerings to remain in the black.

The more likely outcome is that the rate cut will encourage more first home buyers into the market and cause the spiral of home prices to take another upward twist.  The required deposit is already at an all time low and many new buyers now have minimum equity in the home they are buying and are really gambling on ever higher prices.

Past history tends to back that gamble.  Many first home buyers struggled to pay the mortgage for the first year and then placed the home back on the market - and made an immediate gain of a hundred thousand dollars because of home price inflation.   The wise will remember the short lived 08 recession and the speed with which the banks foreclosed on delinquent mortgages.  The house price spiral collapsed because of lack of buyers and that failed gamble left many without a home but still owing a massive mortgage debt.

Interest rates are at an unusually low level in world financial history and it is inevitable that they will restore natural balance between lending and saving.  The benefit of low interest rates being a gain for borrowers is balanced by people with superannuation needing a return on their money to back living expenses.  The lack of a safe return from money lodged with banks is encouraging risk taking by speculation on the share market and other risky ventures.  The pressures that force interest rates to rise or fall are propelled by differing needs.

The fate of the money market will depend on which way the Reserve bank decides today.  Will it deliver a win for the borrowers - or the savers  ?  The one thing that is very certain is that this low interest rate will be judged an anomaly and  they will eventually rise to as more traditional level.  The wise people will be the ones who correctly guess just when that will happen !