Interest Rate Risks !

The Reserve  Bank of Australia took an enormous risk yesterday when they cut the cash rate to a record low 1.25 percent.  Theoretically, this should ginger up the economy because the people with home mortgages will have more money in their pockets to spend and spending that money should be reflected in more people gaining a job to service that demand.

The problem with " theoretical " solutions is that they usually don't work out that way.  There is the expectation that mortgage rates will drop but the banks are still licking their wounds from that bank Royal Commission and it looks like the rate cut will only be partially passed on to bring mortgage relief.  ANZ bank has indicated it will grant just 0.18 of the Reserve banks 0.25 reduction on to borrowers.

We live in a particularly perilous world with China's Foreign minister making thinly veiled threats about Taiwan and Chinese acquisitions in the South China sea.  The worlds two biggest economies are engaged in a tariff war and it is hard to expect that can end peacefully.  The pundits are talking about a coming recession and Australia has nothing in the kitty to cushion the outcome.

When the world economy went sour in 2008 we had a twenty billion surplus in hand and we went into deficit to splash money where it would do the most good.  House prices took a dive but they quickly recovered and went on to scale new heights.  No one can accurately predict what will happen with home values if the world economy takes another dive like 2008.  One of the things that saved the day after 2008 was a drop in interest rates.   We no longer have that option waiting in the wings to come to our rescue.

Unfortunately, Australia is very much a small player when it comes to the world economy.  The big issue at present is this tariff war that America's president chose to inflict on China.  That is fast developing into tit for tat upgrades and it could easily revolve into the entire upset of world trade patterns.  Perilously, the world seems threatened by dividing into blocks supporting either China or the United States.

Europe is in flux with the British withdrawal from the EU nothing short of an unholy mess.  There is a far right mood sweeping many European countries and barriers to migrants are threatening the magnificent  Schengen concept which allows Europeans to cross national borders without passports or visas and have the use of a common currency.  Once again the spectre of dictators is rising as voters abandon the traditional political parties.

Our Reserve bank has made a decision and we have to live with it.  It would be a healthier financial world if interest rates were a lot higher but the signs of recovery are fast melting away and it looks like a particularly rough road ahead.  We can only hope that the Gods of commerce are kind, and Australia rides out this blip in world finance by retaining that epithet of " the lucky country "  !