We are almost daily bombarded with calls for the RBA to lower rates yet again.
I suspect most of these calls - and the prevailing sentiment created by them -  are coming from sectional interests. They may be based on honest beliefs that this would be good for the economy and the country generally but whether this is true or not is up for discussion.

The basis of the calls is that a further lowering of rates would give a boost to growth. But would it?
We have seen rates in Europe dropped to near as dammit to zero without any great effect on most economies. It might be said that the same action in the USA has seen an upturn in the economy, but has that been due to this or other factors.
The US has had a massive boost to the economy in the past few years from the shale oil & gas boom. It has also been impacted by money printing on a grand scale, which they now prefer to call quantative easing. And also the US banking system is quite different to Europe or Australia, much more diversified and decentralised.

I don't know what the economists say in general . . .what they're paid to I suppose. But it seems to me there would be an "elasticity effect" with interest rate movements. When our rates came down from around 17% to say 10 or 12, I've no doubt that had an accelerator effect through the economy.
But a drop of .025% from an already low 2.5% (?), would that really stimulate anything?
It may give a marginal boost to the stock market and the housing market, but it would be marginal. So marginal that you would be hard put to measure it or even be sure any movement was due to that or something else. It wouldn't put much more discretionary income in the hands of the Little Aussie Mortgagor than a cup of coffee. (and they really should be getting that from an Aldi coffee machine anyway)

All in all, I think a further cut in the rate would be whistling in the wind or doing something else in the wind.

But you may disagree and I won't be at all surprised or upset.

So do you agree with the idea of their being an "elasticity effect" or, if you like, a "propensity to stimulate" with interest rates:
- the smaller the movement, the less likely to have an effect
- the closer to zero, the less likely to have an effect

And do you think this pressure for a rate cut is being promoted by sectional interests, such as the banks & the housing industry.

bogarde73 wrote on Apr 16^th, 2015 at 12:13pm:


Yes, Yes & Yes!

Also, as can be seen from the following, the banks have something to answer for!
But, so to, do both major Political Parties!

perceptions_now wrote on Apr 15^th, 2015 at 8:45pm:

perceptions, you will have noticed the spate of news items in the last couple of days, prompted by various interests, ramping up the pressure for a rate cut. It's relentless and the RBA will unfortunately cave in.

bogarde73 wrote on Apr 16^th, 2015 at 12:13pm:


I agree.
I also think that our economy has changed and that near zero interest rates don't promote growth. They may actually hinder it.
For one thing any savings made on lower interest rates seem to be used towards ever spiraling higher house prices. Existing mortgage holders just use the interest rate reduction to pay down some of their massive debt. Either way it doesn't contribute towards growth.

On the other hand you have a growing pool of retirees living off their retirement savings. Reductions in interest rates reduce their disposable income so it actually reduces economic activity.