One of the nation's unheralded preoccupations is guessing the course of interest rates. I do it all the time for Sky News on many nights of the year when I chat with Michael Willesee.
And I have been harassing the Reserve Bank for over a year and a half to stop raising rates and then I turned to arguing for rate cuts.
But now I want to lay my cards on the table and tell everyone that I'm hoping we don't see anymore than two more cuts! That's right — I want to see some easing but I don't want to see the kinds of cuts we saw when the GFC hit in 2008.
Recent rate cut history
In September of that year the RBA cut rates by 0.25 per cent and that was the first cut in almost seven years. Then in October it stunned the market with a 100 basis points cut or 1 per cent as the world looked headed towards a Great Depression MkII.
It let loose again with a 75 basis points cut in November taking the cash rate to 5.25 per cent.
In December 2008 and February 2009 the Bank cut by 1 per cent each month, taking the cash rate to a low 3.25 per cent and this was the lowest rate since February 1964 when it stood at 3.18 per cent.
""Interest rates have now been cut four percentage points since September – the most aggressive easing cycle on record,"" said CommSec economist, Craig James, at the time. ""For someone on the average wage, recent rate cuts are equivalent to a 15 per cent lift in income.""
Believe it or not, in case you have forgotten, the Bank cut again in April 2009, which took the cash rate to 3 per cent, which was a whopping 49-year low!
To understand the impact, have a look at these figures: A borrower paying off a $300,000 home loan had saved over $5500 in repayment costs since rates were first cut in September 2008.
Up and down
Right now our cash rate is 4.5 per cent and I reckon if we can see official rates fall to around 4 per cent and home loan rates come in around 6.25 per cent, then it could be an attractive rate to create some real consumer, homebuyer and business confidence.
Of course, when rates are going up, there's fear, loathing and anxiety but when they're on the slide, there's a sense of anticipated optimism. However, right now our saving levels are around historical highs and we're so committed to the activity that we're cutting up our credit cards!
The average credit card limit grew by just 1.5 per cent over the year to September and this was the slowest growth on record, or in 17 years. And the average balance fell by $10.30 to $3292.60 in September.
Global issues
This is precisely why we need to see some more rate cuts because I do not think one or two will do the job to get Aussies interested in borrowing again. We were spooked by talk of three more rate rises a year ago and then we saw stock markets tumble, natural disasters from Japan to Queensland wreck economies, US politicians do enough to help America lose its AA-credit rating and then Europe's disastrous debt rescue plan KO stock prices in the second half of the year.
And all of the time, the RBA's relentless rate rise policy squeezed the slow part of the economy, which contains most of the businesses, the employees and the consumers!
Two more cuts
Given all of this, you might think I should be calling out for four or five rate cuts or maybe more but I think that would be excessive.
My gut feeling says two more cuts over the next six months, giving time for the Europeans to eventually come up with a credible debt management and EU stability plan, should be enough to spark some positive life into the economy.
Under those circumstances, Aussies could become confident again and this would make them think about borrowing to buy homes, retail goods and for businesses to start investing for future profits.
The European connection
So, why don't I want four or five cuts?
Well, that would mean that the Europeans have stuffed up the rescue process forcing bond yields up leading to a run on stock markets, which would result in a worse than expected European recession, and this in turn would choke the US economic recovery.
The RBA would be taking the cash rate down towards 3 per cent again but this time unemployment would go higher than 6 per cent here in Australia, which it did not breach during the GFC.
Back then economists expected unemployment to go as high as 10 per cent and there were plenty who argued this point but this time it could happen. Why?
Because the failure of Europe to fix its sovereign debt problem will backfire onto European banks, and when the big banks of the world have a problem, we all have a problem.
Pray for only two or three more rate cuts and put in a prayer for the lost souls who masquerade as politicians in Europe!
