Cuts are not the answer
THE Reserve Bank should learn from the experiences of other developed economies that dropping interest rates to zero will not kick-start the economy. Rather, it will exacerbate Australia's current account deficit and the Australian banks' dangerous reliance on international wholesale funding markets for liquidity. This is because consumers will respond by saving less and borrowing more without any sustainable positive impact on the economy. Furthermore, as a tax-paying saver who will now earn 1.5 per cent after tax on my savings, I am appalled that I have to bail out struggling retailers and borrowers. The RBA's main mandates are to control inflation and maintain full employment. Australia's inflation is near the upper limit of the target band, while unemployment at less than 6 per cent is comfortably low.
I fear that Glenn Stevens is responding to pressure from the government and business groups rather than keeping to this mandate. The result is a transfer of wealth to businesses and people that borrowed too much, at the expense of savers.
David Feldman, Caulfield
Lower expectations
IT'S time for banks to share the pain ("Banks pressed on cuts", The Age, 5/12). Expectations of bank management and shareholders for record profits year after year can no longer be sustained while the rest of society continues to pay an increasing price. While many businesses suffer, and employees and families with them, can we allow banks to continue to buffer their profit margins when they have benefited significantly from government guarantees and enough market clout to protect their own profits, against the broader economic interest? It's time expectations were adjusted all round, and lower profits for banks understood as part of the economic downturn.
Gary Heard, West Melbourne
We've worked hard, too
ACCORDING to our Treasurer, Wayne Swan, the only "hard-working Aussies" are those with mortgages. Clearly, he has no regard for the dwindling incomes of self-funded retirees or investors, and those planning retirement won't be happy either. These people will hardly be rushing out to increase spending, and may even find little left to donate this Christmas. Many may now need to apply for the pension and healthcare cards.
Breda Hertaeg, Beaumaris
Wrong on timing
THERE'S "room" for an interest rate cut, Mr Swan, because economic conditions are starting to worsen ("'Just plain dumb': Swan rejects fiscal 'stupidity' warning", theage.com.au, 5/12). Labor got it right, better than any other Western country, before the global financial crisis, but it isn't right now. The Rudd government wasn't advocating a surplus before the GFC when interests rates where being cut to avoid a recession. The Gillard government should not be pursuing one now as economic conditions worsen. We are vulnerable to any repeat GFC because two key players in our GFC escape, Kevin Rudd and Lindsay Tanner, are no longer influencing economic policy. And don't look for a sensible surplus policy from the Coalition. Theirs will be far more dangerous.
George Finlay, Balaclava
Frequently Asked Questions about this Article…
Will cutting interest rates be enough to kick-start the Australian economy?
Letters in the article argue that simply cutting interest rates to near zero is unlikely to kick-start the economy. They warn rate cuts could exacerbate Australia’s current account deficit and increase banks’ reliance on international wholesale funding, while consumers might respond by saving less and borrowing more without producing a sustainable boost.
How would interest rate cuts affect everyday savers and retirees?
According to readers quoted in the article, rate cuts can unfairly penalise savers and self-funded retirees by reducing their income — one letter even cites earning about 1.5% after tax on savings — potentially forcing some to seek pensions or healthcare cards. The overall view is that lower rates transfer wealth toward borrowers and businesses at the expense of savers.
Do interest rate cuts automatically help struggling retailers and mortgage borrowers?
The article conveys skepticism about that idea. Some writers argue that bailing out struggling retailers and borrowers via lower rates simply shifts wealth and cushions those who borrowed heavily, without guaranteeing a sustainable recovery in spending or the broader economy.
Should banks ‘share the pain’ if the economy weakens and rates are cut?
Several letters call for banks to share the pain, suggesting expectations of record bank profits are unsustainable during a downturn. Writers note banks have benefited from government guarantees and market clout, so lower profits for banks should be understood as part of broader economic adjustment.
Could interest rate cuts worsen Australia’s current account deficit or bank funding risks?
Yes — the article highlights concerns that very low rates could worsen the current account deficit and increase the Australian banks’ dangerous reliance on international wholesale funding markets for liquidity, raising systemic funding risks rather than resolving domestic demand problems.
What are the Reserve Bank of Australia’s mandates, and do current conditions justify a rate cut?
The RBA’s main mandates are to control inflation and maintain full employment. The letters point out inflation is near the upper limit of the target band and unemployment is below 6%, suggesting many correspondents believe those conditions don’t clearly justify aggressive rate cuts.
Is there political pressure on the RBA to cut rates, and why does that matter for investors?
Some writers fear the RBA Governor (Glenn Stevens at the time of the letters) may be responding to pressure from government and business groups rather than strictly following the RBA’s mandates. For investors, that raises questions about the independence of monetary policy and the reliability of policy-driven market outcomes.
What practical takeaways should everyday investors draw from the debate over rate cuts and bank profits?
The article’s contributors suggest everyday investors should be aware that lower rates can hurt savers and boost borrowers, that banks may see pressure on margins and profits, and that fiscal and monetary timing matters. In short, monitor interest-rate risk, bank sector dynamics and policy announcements rather than assuming rate cuts will automatically improve economic conditions.
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