The "interest rate cut"

may do more harm than good. Does that sound ridiculous?

I am not an economist. I work on the simple basis of "if I don't have the money to pay for it then I cannot afford to buy it". So far I have managed to get through life without a "credit" card. There may come a time when I "need" one but while I can do without one I will. I do have a second debit card which works like a credit card but I can put a limited amount of money in that account to pay a bill and that is all I need to do.

But other people have mortgages. They owe more money than I can dream about. For them an interest rate cut must seem wonderful. I am left wondering if it really is. It could be. If you went on paying off your home loan at the same rate as before then yes you might really benefit. If you simply think of it as a few extra dollars coming in and use it to pay the bills then the same benefit will not be there but the pressure might be off at least a little.  Perhaps both things are beneficial, particularly the first.

But the temptation will be there for some to simply use the money for the things they are being told they are missing out on. The meal out, other entertainment, buying a coffee on the way to work and more will all add up. Inflation becomes an issue again and you suddenly find there is an interest rate increase...and another. You end up being worse off than before.

I was not surprised there was an interest rate cut but I am wondering if it is really a good thing. Our Reserve Bank has been "restructured" by the government. It has been split in two. It has allowed the government to influence the decisions which are made because it now has people there who have helped the current government make the policies they are trying to implement. Yes, the old Governor "got it wrong" on interest rates - or so they would have us believe.  We like to forget he was trying to help a government keep an economy together through a pandemic which had major global economic consequences. It may never be possible to work out if his approach was right or wrong even while people say they would do things differently now.

Yes, perhaps they would but I wonder what the consequences of doing something differently would be. If I was struggling to pay that mortgage it would be tempting to pay less.  If I thought I could save money in the future would I continue to pay as much as before? That would be tempting too and I might just do it. 

But right now I am just wondering if a politically motivated interest rate cut might not fuel inflation.