Glenn Stevens famously once said that he understands the pain that savers suffer from lower rates because he gets plenty of feedback and correspondence when he drops rates.
But the release of the minutes of Stevens’ last board meeting as governor of the RBA have been released and they shine a light on why interest rates in Australia still have a bias to head lower even though savers are impacted by super low rates on their at-call and term deposits.
The minutes reveal that the board had a discussion around the relative impacts of lower interest rates on borrower households – those with a mortgage – and saver households in terms of the impact of lower rates on consumption.
That discussion shows the RBA board still sees merit in monetary accommodation, even at these low levels which have seen the cash rate drop to 1.5%, term deposit rates head toward 2%, and driven the availability of scores of standard variable rate mortgage offerings below 4%.
The minutes say:
Members discussed the effect of lower interest rates on consumption growth via the cash flow channel of monetary policy. They noted that the positive effect of lower interest rates on the disposable income of borrowing households is larger than the negative effect on the income of lender households, as the average borrower household has two-to-three times more net interest-bearing debt than the average lender household has in net interest-earning assets. In addition, on average, borrower households are likely to be significantly more responsive to changes in income that are related to changes in interest rates because they are more likely to be liquidity constrained.
Put simply, dropping rates still works in lowering the burden on the economy overall.
But the minutes also showed that the transmission mechanism between lower rates and consumption growth is weaker than it once was.
“Members noted that, since the global financial crisis, borrower households have been likely to use more of an increase in their cash flow from any source to prepay their debt, which might imply a delay in the response of consumption spending to lower interest rates,” the minutes say.
While the minutes overall suggest the RBA remains on hold for now, this discussion suggests that even at these low rates, the RBA board still believes further cuts in interest rates could assist the economy if they are needed.
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