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Record-low rates not stimulating spending

Slow business investment and a relatively solid dollar have weakened the effects of low interest rates, according to a new report by a global research firm.

IBISWorld said the record-low cash rates since August 2013 have not provided any substantial stimulus for economic growth and, as a result, the power of monetary policy has diminished.

“This has been a driving factor behind the Reserve Bank’s decision to further ease monetary policy over the past three months, leading to an all-time low cash rate of two per cent,” the report said.

“The effects of lower interest rates generally flow on to the wider economy in a variety of ways, such as through changes in credit supply, exchange rates and savings and spending behaviour.”

In spite of this, the report said lowering the cash rate further has failed to have any significant impact on consumer and business spending, and has instead added to the inflation of asset prices, particularly in the housing market.

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“Despite recent improvements in household demand and some unexpected employment growth, business capital expenditure is still lagging behind the economy as a whole, even after removing the effects of declining mining investment over the past two years,” the report said.

“While a lower interest rate has fuelled housing lending, it has not had the same effect on business lending.

“Non-mining capital expenditure by the private sector peaked in 2012 and has yet to return to the same heights, even after multiple subsequent declines in the cash rate.”

The report noted confidence from board members and small business owners will be needed to kick-start business spending.

“Ideally, more businesses would [need to] take advantage of the lower interest rates for expansion, driving growth in other areas of the economy to balance out the surge in house prices,” it said.

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“However, more sustained household demand will be required before any substantial upturn in business lending and investment becomes apparent.”

Record-low rates not stimulating spending
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