Message to Reserve Bank of Australia – don’t cut interest rates

The case against a rate cut mounts as we approach the first Reserve Bank of Australia board meeting for 2013. With the official cash rate currently sitting at 3.0% some in the market have argued for further cuts. In fact two of Australia’s major banks, ANZ and National have forecast cash rates of 2.0% and 2.25% respectively by calendar year end. They justify their views based on a slowing Australia economy and the need to activate much needed growth outside our resource based industries.

So let’s back track a touch. Back in 2007 cash rates began the year at 6.25% and ended at 6.75% following Reserve Bank Governor Glenn Stevens move to tighten monetary conditions. Unfortunately, the tightening continued into the new year even though globally things were unravelling. By March 2008 cash rates had peaked at 7.25%, before starting a long descent through to 2009 where they hit 3.75% in December. Fearful that the economy was on the mend, the Reserve Bank once again started hiking rates in 2010 before peaking a second time in November at 4.75%. Since then rates have been on the slide and now the big banks are betting that further falls are in store.

It’s hard not to be critical of the Reserve Bank considering the moves that have occurred over the past period. So today some in the market are asking for more cuts because things are tough. We don’t quite see it that way. Despite what the Reserve Bank or Government think, consumers and businesses will spend and invest when the environment is receptive. So far this Government has placed more obstacles and introduced more red tape and bureaucracy into everyday business life that has stifled investment. Consumers will spend but cost of living expenses have forced a re-think and led many to pay off their debts. This is both commendable and prudent but this doesn’t create jobs and revenues are not growing as strongly as some would like.

Our advice to the Reserve Bank is to leave rates alone, they are low enough and attractive enough to undertake prudent and sensible investments. What is more important is an acceptance that Governments do not create jobs, despite their best attempts to tell us otherwise. Businesses create jobs, they invest capital, and they take risks. The quicker the Reserve Bank and our Government understands this very important point the quicker will capital be deployed both prudently and productively.

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