Play the percentages with cuts

The reduction in interest rates indicates that inflation is no longer a worry and further adjustments are on the horizon.

The reduction in interest rates indicates that inflation is no longer a worry and further adjustments are on the horizon.

CONGRATULATIONS to me for picking the Reserve Bank's rate cut, even if I did cheat. Well, a little bit.

Since the bond market is unusually sensitive to the goings on - or I should say what isn't going on - in Europe, I just took its word. Not that there was much choice, the way the experts couldn't decide whether they were coming or going.

Right through the GFC and this end game in Europe, the bond market has been a crystal ball for what subsequently transpired. It looked weird at the time but it was right.

So when the 10-year bond yield can't even crawl to 4 per cent, which is less than the official overnight cash rate even after it's been lowered, it's best to pay attention.

Even more so when the yield on three-year bonds is struggling to hold 3 per cent, a dead giveaway there'll be four or five rate cuts next year.

At least that'll save the government interest on the budget deficit.

Not much will be passed on to borrowers, mind you. There's got to be a message there about fixing.

It's a scary insight into how the European sovereign debt crisis will unravel. Rates so low can only mean a global recession.

Luckily, we should escape most of it. As the September quarter national accounts showed, the mining investment boom I keep banging on about is unstoppable.

But it will be uncomfortable because the dollar is likely to come back down, though that would be a reprieve of sorts for the rest of the economy.

By the way, if you were worried the government is wimping out in the austerity department, let me tell you public sector spending contracted 7 per cent in the quarter and 10 per cent over the year.

Inflation has officially all but disappeared. It's at 0.3 per cent or an annualised 1.2 per cent.

That sounds suss, I know. Just look at electricity bills, school fees and health costs.

But prices are falling for a lot of things too, such as cars, electronics and, in a good week, sometimes even food.

It tallies closely with the consumer price index, which is a survey - and since the national accounts count everything, that settles it.

For the Reserve Bank, inflation, always an impediment to falling interest rates, is yesterday's problem.

Growing unemployment, unfortunately, is the new challenge. Think small businesses because they generate most new jobs.

Although they got the rate cut this time they may not be any better off. As the economy slows they're considered bigger risks and so the banks bump up the credit margin added to the base rate instead.

Maybe I'm showing my age saying this, but the populist pandering to home borrowers comes at a cost, themselves included.

The truth is the banks have us all by the short and curlies.

Cut lending but not deposit rates and shareholders pay.

Too bad, eh? Except that bank stocks happen to comprise a good part of almost every super portfolio. That's right, you'd finish up paying.

For their part, depositors are typically retirees who have nowhere else to go if their rates drop.

At least home borrowers can go to cheaper non-banks. The cheapest variable loan (try UBank's special 6.14 per cent offer) is a couple of rate cuts below the banks', after they give a discount of about 0.5 per cent if you ask nicely, though I guess they won't be doing that much longer.

For savers who switch to non-banks or online banks there's not much in it.

Look further afield and they take more risk. Still, if the banks keep some of next year's rate cuts up their sleeves, then deposit rates might not drop far at all.

The shoe will be on the other foot but, in the spirit of the season, think of those who'll be paying for it.

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