By Joe Montero
The Reserve Bank has just cut the interest rate by 0.2 percent. While this might please mortgage holders and others paying oof debt, the question whether and by how much will the banks transfer this to their customers. Regardless of this, the government will not resist the temptation to talk this up as a testament to its good management of the economy. As for the banks. The small ones say they are passing the cut on. The big four have said no such thing. All they have committed to so far is that there will be a cut. They haven’t said by how much.
This interest rate cut comes after holding it level for three consecutive quarters, and although there is an amount of political expediency this time, the fundamental truth is that interest rates are the result of how the economy is working, and in a more direct sense, about the value of the Australian currency. Governments and the Reserve bank have little control over it except for tweaking in the short run. Ther economy and the real value of the currency will always assert themselves before long.
So what is the situation? Australia produces less and less s time passes, while borrowing moves in the opposite direction. Debt growth is Australia’s primary industry. We now owe according to Treasury and Budget figures $19,300 for every person living in Australia. This is up from $18,500 last year. Debt creation is certainly a growth industry.
Australia’s debt is made up of government and private debt. The government component stood at 43.80 percent of the country’s Gross Domestic Product (GDP) by the end of the 2024-2025 financial year. Private debt had already reached 126.28 percent of GDP by 2024. This is where the obvious debt problem exists. Private debt consists of business debt and household (consumption) debt. Household debt stands at 109 percent of GDP according to the Reserve Bank. Private business debt is less clear, but it is also substantial.
What does this have to do with the interest rate? A great deal. An interest rate pushes the demand for money downward when it reaches a point where the demand for more credit. A fall in government spending can do this. This wasn’t the case. Even if it was, the bulk of Australian debt is private. Slowing of business debt is indicated by the fall in capital expenditures growth
Capital deployed by businesses fell by 14 percent in 2024 and is continuing to fall in 2025. Australian business is declining as household debt increases. Unemployment in both nominal and real terms are on the way up. This is expected to continue.
Meanwhile household debt continues to go up.
All this makes it clear that Australia is no producing enough to pay for rising debt.
The discrepancy between debt growth and falling capacity to raise the means to pay off this debt leads to a fall in the value of the Australian dollar, and one of the effects of this is to exert a downward pressure on the interest rate. This is not a sign of a healthy economy. While this is one of the economic headwinds in the present reality, it remains extremely important and the key factor behind the small lowering of the interest rate to 2.6 percent. It would even keep on falling in successive quarters, were it not for the government and Reserve Bank trying to please investors. A high interest rate is good for the lender, and the keeping private lender happy is seen as the path to fixing the economy.
The alternative is to manage the economy in a way that ensures real investment in growth, rather than solely relying on the investor and market.