Rates cut would not be a win-win situation for all

*(1/2)
HangZhou Night Net

CHANGES in interest rates create winners and losers.

One commenter on a story at www.theadvocate杭州夜网.au headed “Rate cut hopes grow” on Tuesday wrote:

“Hope? Why should I hope that I get less interest on my savings?

“Like the majority of Australians, I do not have a loan, so why does the paper assume that a rate cut is positive for the average Australian?”

Here goes –

MORTGAGES

In 2011, according to the Australian Bureau of Statistics, 36.2% of Australian households were home owners with a mortgage.

That covered about 7.95million Australians who would stand to benefit directly from rates cuts through lower mortgage payments or paying off their mortgages more quickly.

(This assumes fixed rates would also come down in time in response to any cuts the Reserve Bank may make on Tuesday and beyond).

A further 32.6% of Australian households were owners without a mortgage, covering about 7.2million Australians.

The third significant group, renters, made up 27.6% of households (about 6.1million Australians).

A number of those would be keen to get into the housing market, and lower rates would make it easier for them to do so.

THE DOLLAR

The high Aussie dollar has been a mixed bag.

It has led to lower import costs, but has also put great pressure on much of the manufacturing sector and on tourism.

In 2010, according to the ABS, 983,500 Aussies worked in manufacturing.

It would probably be conservative to assume the high dollar would be putting pressure on the employers of three quarters of those.

If so, that would be a ballpark 740,000 Australians whose manufacturing jobs were being affected or were in danger from the high dollar.

A further 752,800 Australians were employed in the accommodation and food services sector.

Assuming a quarter of those jobs were affected or threatened by the high dollar, that is a further 190,000-odd people.

Part of the reason for the high dollar is our interest rates, which are extraordinarily high by current developed world standards.

While that is a sign of relative economic strength, interest rates coming down closer to those of other developed countries would help bring the dollar down over time and ease stress on manufacturers and tourism.

RETAIL

Retail employed 1.24million Australians in 2010.

Retailers widely believe cuts to interest rates help lift public confidence and public spending.

Australians have become increasingly frugal in recent years.

BUILDING

Construction is another key sector regularly calling for rate cuts.

It employed 1.04million Australians in 2010.

Like retail, it is having a challenging period, with many firms under pressure.

BUSINESS

Cuts to interest rates tend to help many businesses by lowering their costs.

This can lead to increased profitability, support or grow job numbers and improve share prices over time.

SHAREHOLDERS

Most Australians own shares these days, either directly or through superannuation funds.

A rates cut would broadly be good for the share market and super balances.

SELF-FUNDED RETIREES

These people are some of Australia’s unsung heroes.

They reduce the burden on taxpayers by funding their own retirements and this will become increasingly important as the population ages.

They certainly have a point when they worry about rates cuts eroding incomes.

There are believed to be more than 280,000 of them in Australia.

Even so, those are relatively small numbers compared to some of the groups mentioned above.

CONSUMERS

While a rates cut would be an overall win for consumers, a lower dollar would push up import prices.

Those keen on plasma screens and other electronic doodads may do well to get in soon.

ON BALANCE

It seems clear many more Australians would benefit from a rates cut than would be significantly hurt by one.

The “greater good” argument, therefore, supports rates cuts.

So do recent economic developments.

This article first appeared in Hangzhou Night Net.


Comments are closed here.