Shane Oliver at AMP recently tweeted:
Why rate cuts help household spending: 1/ Aust hholds have approx $750bn in deposits but $1700bn in debt….
…so a 1% rate cuts makes depositors $7.5bn worse off, but borrowers $17bn better off. The net gain for households is $9.5b !
Reason #2 as to why rate cuts help. Depositors r less likely to change spending on rate changes than borrowers (families with mortgage)
He is right that rate cuts stimulate household spending, but that is not the only consideration. Rate cuts also stimulate borrowing and expansion of the money supply — leading to asset bubbles and inflation. They further force savers/investors to take greater risks in the scramble for yield, leaving them exposed if the bubble collapses. If only we could let market forces of credit supply and demand determine the rate — and resist the urge to tinker.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.