Reserve Bank out of touch

MOST economists think the Reserve Bank board will ease interest rates by 0.25%. In fact, there is a feeling out there that interest rates will fall a full 1% over the next 12 months.

Why? Firstly, the attractiveness of Australian rates to foreign investors is helping keep the dollar overvalued despite there being significant falls in commodity prices. This has the effect of keeping our imported cars, white goods and electronics cheap relative to prices just half a decade ago but that's about it for good news to ordinary Australians. Our manufacturing sector simply can't compete. Read across-the-board job losses and, just as significantly for the economy, fear of job losses. The result? According to the Reserve Bank, Australians are still putting money away for that "rainy day". In fact 25% of our financial assets are now in savings deposits and share ownership has halved. The effect is that we are just not spending.

Secondly, recent cuts have failed to stimulate the housing market and the consumer confidence that traditionally follows.

Thirdly, the two-speed economy is a reality. Cleaners and truckies don't earn $100,000 to $150,000 in "real" Australia. These are the numbers that belong only to the resource boom towns and cities like Gladstone. Mr and Mrs Average in the second-tier economy are in "struggle street" facing exploding government fees and charges, utilities costs, fuel prices, public transport costs and general across-the-board hikes of day-to-day living costs as these costs impact on businesses, which simply must pass them on.

Last Thursday, CEO of Woolworths, Grant O'Brien said that "interest rates being pushed down can only help" shift "lacklustre consumer sentiment" (read willingness to spend) in the next six months. Given that Woollies (despite the write-down of the Dick Smith business, now duck-shoved to equity group Anchorage) posted revenues of $57 billion in 2012 financial year, I suggest the man is well qualified to surmise that the Reserve Bank seems to have lost contact with consumer spending which is a leading indicator and seems to have been reactive rather than proactive in managing the economy. A leading economic indicator, by the way, points backwards to the results you can expect in an economy.

Bob Lamont is Senior Partner in Corporate Accountants and Rid Tax situated at the Night Owl centre. He welcomes your questions directed to boblamont

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