This article originally published in The Northern Daily Leader on 6 December 2013.
The board of the Reserve Bank of Australia met this week to decide on interest rates, as is usual on the first Tuesday of each month (except for January). It’s no doubt a serious affair, with much discussion of global economics and finance, although I have a standing joke with Graham Archer from 2TM that the biggest decision the board needs to make is whether to have red or white wine with their meal. To be fair though, the board does shoulder a heavy responsibility. The level of interest rates, as targeted by the RBA, generally sets the benchmark for all interest rates throughout the economy. Your mortgage rate, credit card rate, term deposit and savings account rate are all influenced by the RBA board’s interest rate decision. Unfortunately, the actual decision of the board has become somewhat of a media circus. When interest rates increase, the nightly news is filled with images of young families struggling to make ends meet and cover the mortgage. However this picture ignores the reality of housing in Australia. Only around a third of all homes in Australia are owned by households with a mortgage. Another third of homes have been paid off by their owners, while the remaining third are owned by investors. So when the media focuses on the struggling young family, they’re focusing on a relatively small proportion of the population.
The RBA board members probably deserve a good lunch and bottle of wine each month however, given the complex set of economic circumstances they must manage. The analogy I like to use is that of a relay race. The mining sector has been doing all the running for the past few years, but is flagging quickly. The RBA is trying to engineer a smooth handover of the economic growth baton from the mining sector to the rest of the economy. At this stage however, it looks like the track coach forgot to give the rest of the economy the signal to start running. Low interest rates are starting to have an impact, but it may be too slow to get the economy going when the mining sector finally runs out of puff and slaps the baton into the rest of the economy’s out-stretched hand. Fortunately this is a one-horse race, so we can’t lose, but we could spend some time crawling around the track, rather than sprinting like we have become accustomed to. This has implications for jobs, housing and our standard of living. So let’s hope the RBA board members limit themselves to just one glass of wine during lunch; this is not the time to start thinking we’re invincible.