Kylie fan Shane Wright in today's West Australian takes us back to December 2001
Seven years ago, Kylie Minogue launched her comeback single Can’t Get You Out of My Head.
Seven years ago, Peter Costello was an ambitious treasurer destined to become Prime Minister.
A barrel of oil could be bought for less than $US20 and inflation was running just above the Reserve Bank’s 2 to 3 per cent target band.
And it was seven years ago, on December 5, 2001, that the Reserve Bank last cut official interest rates.
At the time, this is what Mr Costello had to say about the decision to take rates to 4.25 per cent — their lowest level since before man walked on the Moon:
“What we’re trying to do is we are trying to ensure that in a global economic downturn, and the United States, the world’s largest economy, is in recession, the world’s second largest economy, Japan, is in recession, in a global economic downturn, that we can keep Australia strong."
“I welcome the fact that the major banks and mortgage originators have indicated they will pass that cut on in full,” he said. “That will represent a saving on a $100,000 loan of about $20 a month.”
Oh yeah, you read right...
Mr Costello talked about a loan of $100,000, which made sense when the median house price in Perth at the time was $171,800.
Today it’s closer to $460,000, which requires a loan upwards of $300,000.
So when the Reserve Bank announces a cut in official interest rates tomorrow (and, in another departure from 2001, it will be announced shortly after the monthly meeting rather than the following day), it will have been a long time between drinks toasting a rate reduction.
Perhaps Reserve Bank governor Glenn Stevens will read over the statement released by his predecessor, Ian Macfarlane, back then explaining the reason for cutting rates at the time.
On that occasion, Mr Macfarlane was concerned about the global economy. He suggested the cut in rates would act as an important buffer for when some steam came out of the housing market, while spare capacity in the economy would remain strong in the coming year.
Six months later, Mr Macfarlane would change tack with interest rates lifted to 4.5 per cent.
It was the first of 12 consecutive rate increases (the last was in March this year) which, coupled with the other increases caused by the global credit crunch, has taken mortgage rates to around 9.6 per cent.
Put it this way. There are millions of Australian homebuyers who have never enjoyed a cut in their mortgage rates.
There are plenty of people at the Reserve Bank who’ve never seen one, or been forced to explain to the public the bank’s reasoning for such a cut — especially as inflation is running at 4.5 per cent.
Mr Stevens and his team have gone out of their way in recent weeks to tell markets, politicians and homebuyers to expect a cut tomorrow.
Financial markets have fully priced in a quarter percentage point cut, believe another next month is a certainty, and haven’t discounted the chance the Reserve Bank might cut even deeper in coming weeks.
But I would suggest this week’s rate cut — if the Reserve Bank follows up its rhetoric — is far more important to the economy than the one back in 2001.
For a start, the low interest rates offered by the Reserve Bank and other central banks back then helped create the property price bubbles that have not yet unwound (particularly in Perth). Those low rates are the reason so many of us are carrying debts that would make our parents feel ill — and put a smile on the dial of our bank manager.
So the rate cuts that are likely to start tomorrow will mean so much more to a homebuyer now than then.
Another important factor is the price of oil. As I mentioned, back in 2001 a barrel of oil sold for less than $US20, while today you’re looking at more than $US115.
Coupled with oil (which is hurting everyone at the bowser) are other commodities. And it is those commodities such as iron ore and coal that have pumped hundreds of billions of dollars into the economy in recent years.
That extra cash sloshing around the nation is another reason why Australian inflation levels are high even by world standards.
While the Reserve Bank knows the economy needs a boost of confidence via a rate cut or two, it fears that the income from the commodities boom (and super-low unemployment) will keep inflation high.
And last time I checked, the Reserve Bank’s main job is to keep inflation under control.
So, Mr Stevens will tell the nation interest rates are being cut, but also warn against going out and spending that cut.
Indeed, the period 2001-2006 when property prices in every capital city just got silly, is Exhibit A in the case for the Reserve Bank being rather careful as it brings interest rates down.
Globally, central bankers were burnt by the asset price bubbles caused by the super-low rates of the early part of this decade (just have a look at the US if you want to know what happens when cheap money mixes with aggressive mortgage marketing).
As I’ve said before, everyone loves an asset bubble if they benefit. But when it ends (and they all end), that’s when the tears and name calling starts.
All of these factors mean tomorrow’s almost certain decision to start cutting rates will be one of the Reserve Bank’s most important, and one of its most difficult.
For 17 years the Australian economy has grown. Unemployment is at 30-year lows. Businesses are at their most profitable.
To maintain this enviable record, much depends on how the Reserve Bank handles the step down in interest rates.
Don’t cut enough, and with the global credit crunch still crunching economies and companies around the world, then a recession will not be avoided.
Cut too much, and the threat of another asset bubble and high inflation rises considerably.
If either come to pass, there will be plenty of people prepared to swap the Reserve Bank with anyone — even Ms Minogue — to handle monetary policy in the future.