August 02, 2016
Today's RBA decision
The RBA have just announced a 0.25% cut to the cash rate - now 1.5%!!!! An all time low.
Most expected this cut given the latest inflation figures out last week showing annual growth at just 1% (the RBA set a target of 2-3%) and a perceived stabilising in the Melbourne and Sydney property markets.
But what is inflation?
It is a short-hand term for the rate at which things are getting more expensive in an economy.
So, why can low inflation be unhealthy for an economy:
When prices barely move, many people and businesses postpone purchases. Why rush if the same price — or lower — will be available in six months? Collectively, such delays slow consumer spending, the economy's main fuel.
When prices don't rise very much, neither do company sales or salaries. That is, workers won't receive higher pay if their employers' profits aren't expanding.
It also magnifies debt burdens. When income remains stagnant or even drops, then paying the interest on loans becomes a heavier financial burden.
Too-low inflation raises the prospect of something worse: Deflation, a broad decline in prices, pay and the value of stocks, homes or other assets. Deflation can further restrain spending and even tip an economy into recession. Unlikely here, but always possible.
So what now for the lenders?
Most commentators expect banks to only partially pass on the rate cut - they'll hold onto some margin. I'll keep you posted.
Cheers and stay warm…Spring will come!