Running a small business in difficult times is stressful enough, without having to worry about the prospect of rising interest rates. Yet when Glenn Stevens, governor of the Reserve Bank, appeared before the House of Representatives Economics Committee on Friday, he gave no hint that rates would be cut, as many economists had predicted. Indeed, Stevens underscored again how wonderful the Australian economy is compared to the rest of the world and boasted of our low unemployment rate, which indicates that he is more inclined to raise rates than cut them as soon as the current turbulence settles down.
The problem is that businesses large and small need to be able to plan ahead, and Stevens’ appearance on Friday gave little reassurance. All Stevens said is that it is a good thing to “sit still and do nothing” in such rocky times, but that is of little comfort to our struggling business owners. It has arguably got to the point that the RBA’s secrecy is causing a serious crisis of confidence in the broader economy, and this can lead to a destructive cycle in which fear feeds on itself, causing employers to shed jobs and cut back on investment. Indeed, the 9,000 jobs that have been lost in the past month suggest this is already happening.
With economists predicting that around 100,000 jobs could be lost by the end of the year, you would think it was time for some more reassuring words from our central bank – some suggestion that rates will come down to help our struggling non-mining sectors.
Yet the RBA is keeping the prospect of a rate cut hanging over our heads like the Sword of Damocles, as if consumers and businesses needed this extra fear to curtail their spending and keep inflation in check.
But as AMP’s chief economist Shane Oliver points out, most of us are scared enough already.
'We are seeing a wall of constant bad news hitting employers and households, while the RBA seems to focus on terms of trade and the mining sector' said Oliver. 'I don’t think they realise the extent to which people are suffering and the fear businesses are living in. There are many who are just about clinging on, but who are seeing events unfolding overseas such as a possible return to recession in both the US and Europe, and may well throw in the towel because they can see no light at the end of the tunnel.'
Oliver has a point. A cut in interest rates now would have no effect on the factors which are causing inflationary pressures, such as utility bills, food and fuel. Most of the inflation in our system is beyond the control of both the RBA and consumer spending.
A cut to 4.50% would save give homeowners a little more cash each month, and that might just filter through to a little more discretionary spending at retailers. It might also have a softening effect on the dollar, which would help our manufacturers, education, tourism and retail sectors. Residential construction activity has been going backwards for over a year because of affordability issues ie high interest rates - and commercial construction is also stalling as the non-mining parts of the economy get smashed.
Mervyn King, the former head of the Bank of England, once famously said that 'good central banking is boring.' What he meant is that it is better for everybody if the central bank is predictable, and does not have surprises hidden up its sleeve.
Governor Stevens should pay attention. While the RBA has done a pretty good job over the past couple of years, it went too far in the run up the the GFC in 2008 when raising the cash rate to 7.25%, pushing typical mortgage rates to 9.6%. It resulted in a glut of repossessions and unnecessary job losses. That took the market by surprise. We don’t need another surprise like that. Give us some transparency and let our small businesses get planning with some peace of mind.
