Interest rates cut to historic lows – WHY?

This week the RBA cut official interest rates to 1%, the lowest ever in the history of our nation.

Borrowers are happy, while savers, most especially the retired, see their incomes cut.

The question to be asked though is WHY?

We’re not in a recession. The global economy is ticking over fine. Sure, there is worry about the US/China trade dispute, and the Iranian Peninsula is not looking like somewhere to head for on your next holiday, but there’s always something floating around.

So why cut rates to such levels, and leave so little ammunition to fight any future calamities? The answer is jobs. Whilst the unemployment rate is fairly steady, it’s no longer trending down as it once was. The two graph’s below provide further insight:
In the first graph, notice the purple Under-employment line – this is people who have a job, but not as many hours as they would like.

This then ties in with the second graph, where the green line shows a downward trend in hours worked.

So nearly everyone who wants work has a job, but many are not doing as much work as they could be. This is keeping wages down, keeping a lid on spending, and resulting in employers not adding hours to their workers rosters perpetuating the problem.

In the past, most attention has focused on the RBA either keeping inflation in check, or shielding the local economy from global financial turmoil. But it’s worth looking at the RBA’s actual mandate:

The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment, and the economic prosperity and welfare of the Australian people. It does this by using an inflation target to help keep inflation between 2-3%, on average, over time. The tool to manage inflation is the cash rate.​

Notice “full employment” in there. With inflation under 2%, this is now the RBA’s focus.

If the RBA has its way, boom times are ahead. Hold onto your hats (and get any surplus cash into growth assets!).