Economy is in strife because interest rate cuts not reaching small business - Chan & Naylor

A PRE-FEDERAL Election call for no more ‘sugar fix' interest rate cuts by the Reserve Bank - because the benefits were plainly not flowing on to where the economy needed it most, small business -  unfortunately appears to be playing out the way wealth advisory group Chan & Naylor predicted.

 

According to Ken Raiss, a director at Chan & Naylor, historically low interest rates may be a contributing factor towards increasing property sales - witness the flurry of activity in the Sydney market over recent months, triggered largely by investors tapping into the rate cut - however, he said, it was only a portion of Australians with home loans who would actually benefit in the short term.

Mr Raiss said the reality showed no commensurate reduction in business or credit card rates or even household rates thanks to banks holding on to most of the reductions in recent times.

"While approximately 35 percent of home owners have a mortgage and therefore may have an excuse to briefly celebrate, the flow on benefits of an interest rate cut are futile for business lending, job creation or for older Australians in particular who rely on income derived from savings," Mr Raiss said.

He said in view of July's significant 10,200 net employment reduction and the NAB's gloomy 2.2 percent economic growth and 6.7 percent unemployment 2014-15 forecast, the recent interest rate cut belies an economy that is not expected to grow in the short term, "in other words the economy is getting more unwell".

"Now that Australia's economic well-being has been laid bare, any further saccharine fuelled rate changes will do more harm than good, as it hides the real world of a sick economy" said Mr Raiss.

He believes that in the present economic environment, holding off on interest rate cuts, but combined with a good dose of sensible economic reform, may produce the 'tough medicine' required to restore the country to pre-2007 fitness.

"If you do not have a job or have reduced overtime, lower interest rates are not top of mind," he said.

"Whilst some tough tax related questions now need to be asked, we also need to focus on restoring the health to the vital organs of a functioning economy, namely employment, growth and sustainability."

According to Mr Raiss, who believes Australia has in recent years been too rigid and slow to adapt with changing circumstances, a carefully considered band of interest rate increases combined with the introduction of Federal and State Government policies that stimulate business activity could help set the framework for improved consumer confidence, sustainable employment and investment conditions.

He said a healthy and growing economy means more business profits, more tax collection, more jobs and increased living standards which would more than offset increased interest rates that are managed within the Reserve Bank Charter. This has also lately been the approach of new Federal Treasurer, Joe Hockey.

"All this leads to governments being able to fund polices, not look at reducing the pressure on the budget," Mr Raiss said.

"This country has a natural competitive advantage in its education and health systems, our natural resources and a disproportionately large middle class with disposable income.

"A future rate rise may make borrowing more expensive, but enlightened homeowners that have jobs will be happy to pay this slight impost, as will those who depend on their income and living standards from higher interest rates."

http://www.chan-naylor.com.au/

 

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