John Dagge Herald Sun January 02, 2013
YOU can't help but wonder if the Reserve Bank, having slashed the cash rate by more than a third over the past 13 months, is happy with the bang it got for its buck.
It has cut 1.75 points from the official cash rate since November 2011, from 4.75 to 3 per cent. It is now at its equal lowest level since the central bank began monthly rate reviews in 1990.
Only in April 2009, at the depths of the financial crisis when the RBA was working to avert a recession, has it been so low.
And notwithstanding the breakthrough in the US fiscal cliff impasse yesterday, it is set to go lower.
Economists are broadly forecasting another one or two cuts by mid-year. ANZ and Macquarie Bank are tipping the cash rate will hit just 2 per cent by year's end.
The stimulatory measures have given the typical homebuyer with a $300,000 mortgage an extra $62 a week. Yet consumer reaction has seemed anything but resounding.
Spending remains volatile at best. Figures from the Commonwealth Bank show it dipped in August, two months after a rate cut, and again in November, after the October rate cut; and Westpac and National Australia Bank surveys show consumer and business sentiment dropped sharply in November.
The housing market remains subdued. An ANZ report last month noted investment in new property was at "recessionary levels".
Housing investment has fallen to 4.67 per cent of gross domestic product - the lowest since 2001.
So, is the Reserve Bank losing its potency?
Macquarie chief economist Brian Redican says a unique combination of headwinds are blunting the central bank's effectiveness. Prime among these is the fondness for saving we developed during the financial crisis.
MORE than two-thirds of homeowners are ahead of mortgage payments - most by a comfortable seven weeks - and the nation's savings rate is at a 20-year high.
Households are saving 10.8 per cent of disposable income, up from just 0.3 per cent seven years ago.
"There is pretty firm evidence that monetary policy isn't as powerful as it has been over the past 15 years," Mr Redican says.
"When consumers want to save more and not take on debt, when business is not as interested in taking on debt, when confidence is being affected by global concerns, monetary policy becomes less powerful."
Continuing concerns about the economy are also hampering the RBA's ability to stimulate the broader economy as resources investment nears its peak.
Worries about the global economy and job security continue to weigh on consumers and businesses.
The latest Australian Chamber of Commerce and Industry survey shows sentiment about the economic outlook is at its weakest since the GFC.
"It was genuinely disappointing that consumer confidence fell in December after the latest cut," Citigroup chief economist Paul Brennan says.
It's a dilemma of which the RBA is acutely aware.
In a paper published last month, it makes it clear that cutting rates is a less effective tool to bolster the economy than it once was.
It points out that more people now depend on income from deposits.
The sums households have invested in interest-earning assets have grown about 8 per cent a year since 2006; debt has climbed 7 per cent.
Households now have $1.23 trillion worth of interest-bearing assets and carry $1.6 trillion in debt.
"This implies that, in aggregate, the net effect of a change in interest rates on the cash flows of the household sector as a whole would have diminished slightly over recent years," the paper notes.
THE RBA points out that rate cuts still stimulate the economy and will make it more attractive to invest in shares and property.
Mr Brennan echoes the view that low interest rates will eventually gain traction.
"Suddenly it will all fall into place and things will be looking a lot better," he says. "It's just that in the environment we are in, with people wanting to pay off debt, it's hard to know when that point will be.
"And we probably haven't reached it yet."