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Reserve thinks economy is on the nose

Reserve thinks economy is on the nose

Don’t get downwind of the Reserve Bank – it’s piling cow manure on the economy to encourage green shoots.

That, according to Joe Hockey, is the reason the bank decided to take official interest rates to their lowest level on record.

But how much fertiliser is too much?

The Reserve started cutting rates in November 2011 when it took them to 4.5 per cent.

Fast forward to today and the cash rate is now at an all-time low of just 2 per cent. Not even during the Great Depression did the central bank have rates at such a low level.

One of the reasons the bank has been forced into this unprecedented action is us – the nation’s homeowners.

Someone with a $300,000 mortgage was, back in November 2011, facing a weekly repayment of $518.

After yesterday’s decision the repayment on a $300,000 mortgage would be a touch under $400.

The problem is that most of us haven’t reduced our mortgage repayments. We have used that cash to get ahead in our repayments.

If the millions of people with a mortgage had spent rather than saved then the Australian economy would be in rather rude health.

It wouldn’t need the manure assistance if households had the confidence to spend.

And with all this Dynamic Lifter there are weeds also sprouting which could overwhelm the crop. The surge in investors taking advantage of these uber-low interest rates, at a time of slowing population growth, is just one potential trouble.

That’s not the Reserve Bank’s fault. In making the announcement, bank governor Glenn Stevens again hinted tougher lending standards for the banking sector to ensure house prices don’t get out of hand.

Apart from interest rates what homeowners and businesses are looking for is a sign out of the Federal Government that it knows what it’s doing.

On that front no amount of fertiliser will make up for last year’s effort.

Next week’s fiscal blueprint is shaping as a do-nothing Budget more intent on not offending anyone.

But every gardener knows you can’t ignore the problems in the flower beds.