Yesterday the Reserve Bank of Australia (RBA) decided to lower the official interest rate by 25 basis points to 2.5 per cent, the lowest level since 1960. The dollar immediately fell in sympathy, which is great news for Australian exporters, but not so good for importers and those about to travel overseas.
Interest rates have been used as a political pawn over the past few years. In 2007, the then Prime Minister, John Howard, somewhat famously declared that voters should support his party to keep interest rates low and not vote in the Labor party which was renowned for periods of high rates.
In somewhat of a reverse, would-be Treasurer, Joe Hockey, stated yesterday that low interest rates are a sign of a failing economy. The newly re-instated Prime Minister, Kevin Rudd, was quick to retaliate, declaring that the Coalition’s views constituted an ‘appalling’ insult to families who are struggling.
And in the one piece of good news for those still paying off a home loan, somewhat surprisingly, NAB, CBA banks have passed on the cut in full, with Westpac going even further and reducing its interest rate by 0.28 per cent.
Read the RBA’s statement.
Watch Mr. Hockey speak out on ABC TV.
We often hear that lower interest rates are a great thing for Australian families who are struggling to pay off a mortgage, the little Aussie battlers who need a break. This easy generalisation masks a lot of flow-on effects when the official rate goes ever lower. For those who want to buy a property, or are experience difficulty meeting loan repayments, this will ease their pain a little – about $45 a month for those with an ‘average’ mortgage ($300,000). But for the millions of Australians who have already gone without to fully pay off their home loans before retiring, this is bad news. Many retirees receive a full or part Age Pension and a high proportion top up their entitlements with the interest on cash deposits. So when the official rate tumbles to the lowest level, it means that retirees’ income will also go down.
Everything is relative. For those earning an average salary of around $60,000 per annum, a $45 per month saving on a mortgage is useful, but probably not critical. For those existing on a full or part Age Pension, the loss of a few dollars is a cruel blow. So while it may be necessary to reduce rates to this record low for the health of the overall economy, it is important that those who call the shots understand they are causing more pain for many who can least afford it.
And just to repeat myself, can our politicians please understanding ‘working Australians’ means those who are, have or will work? So the men and women who are now in retirement matter every bit as much as those in paid work and those raising young children. Whether you are responsible for a five-year-old or a 95-year-old, your income and financial wellbeing should be of equal importance.
What about you? Are low interest rates a good or bad thing?