Spend to help the economy

The Reserve Bank of Australia has given mortgage holders a Christmas present.

In return consumers are encouraged to spend their mortgage payment savings with struggling retailers so they can enjoy a happier festive season.

And if we spend enough we might be able to get the retail economy moving again.

But how much mortgage holders will save and what impact the latest 25 basis points cut will have on the economy will depend on the commercial banks. All eyes are on the big four which are 

traditionally slow to respond. But don’t expect the full cut to be passed on.

As interest rates have fallen, the banks have shown their unwillingness to pass on the full measure, blaming higher funding costs as the reason for holding back some of the cuts.

Comments yesterday by the chief executive of the Australian Bankers’ Association, Steven Munchenberg, were hardly encouraging: “Banks are facing higher funding costs mainly due to the competitive rates being paid on deposits. While interest rates on deposits remain attractive and 

competitive for savers, when combined with the cost of wholesale funding, deposits continue to put pressure on the overall cost of funds for banks.’’

The higher funding costs, however, do not seem to hinder the banks’ ability to generate mega profits!

With the Reserve Bank Governor Glenn Stevens saying the peak in resources investment is getting closer, it is important other parts of the economy get moving to take up the slack.

The Australian dollar remains high which makes our agricultural exports less attractive. Therefore, the domestic economy needs to get to work to help stimulate growth.

Will the 25 basis points cut be enough to stimulate spending?

Coupled with Christmas it will help, but if spending levels do not improve the Reserve will need to act again in the new year, and with interest rates already at emergency levels, that is not a good position to be in.

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