RBA Cash Rate Decreases – All Bark & No Bite.

For all the hot air around the downward movement of the cash rate by the Reserve Bank of Australia they are creating almost zero impact and are becoming less and less relevant for two reasons. Firstly they do not – in the current economic context – provide real stimulus. Business is not investing because we are in an extended period of low GDP and inflation growth. It doesn’t matter what the cost of borrowing is, most business leaders are in cost reduction mode not business expansion mode and the markets – seeing little capital growth – are exaggerating the pressures on cost cutting as they force dividend growth for returns.

Inflation is low because of discounting. Housing stock – for those who bother to look at it – is low quality and over-priced and interest rates won’t affect that. Mortgage holders are choosing to keep payments high and reduce debt. So the stimulus impact of low interest rates, in particular as they are dribbled out in 25 basis point increments, has no impact other than to hurt people on fixed incomes who then have to reign in spending. In effect this is anti-stimulus.

Secondly, the way banks raise capital is not directly linked to the cash rate so the ability for them to hand on – ‘in full’ as politicians bleat – the cash rate decreases nominated by the RBA is not as simple as it sounds.

Retail is currently tracking around +3.5% up on same period last year. This is well ahead of inflation and GDP growth and is being achieved despite steep discounting.

Basic market conditions – globally – are low, steady growth and these are predicted to be the conditions for many years to come. The danger in the RBA decisions on cash rate is that they leave very little in the tank if we need a real shot in the arm from the impact of a big, bold cash rate change. Right now there is really no room to move in the downward cycle and banks could not borrow at that rate anyway to lend – even if business actually wanted to borrow.

The sooner markets adjust to low real growth and retailers adopt strategies for growth that do not rely on external factors beyond their control the better. The economic context is the economic context and it has nothing to do with monetary policy and more to do with mood. The current political climate means that what really needs to happen in terms of reform is just not going to materialise.

So yet again, it is left up to us to trade our way through this mess of propaganda and poor decision-making by leaders.

The good news is that the banks in this country are amongst the most stable in the world. The market is growing. Consumers are spending. Retail trade is almost double the inflation rate. Cost cutting and discounting has run its course. To grow your retail business now needs a whole new approach that matches global competition and the long-term economic context.

Time to think differently and take control of what you can affect to outperform competitors.