How Record Low Interest Rates as Storm Clouds Gather

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Yesterday’s decision by the Reserve Bank to further reduce the official cash rate to a record 2.5%, is aimed at stimulating the economy by easing financial pressures on home owners, allowing to increase discretionary spending in concert with increased investment in property and building. Researched and written by Debt Fix.

At the height of the Global Financial Crisis, interest rates were savaged in response to global concerns threatening our local economy, going from 7% but even at the height of this turmoil our present day interest rates are set at a lower rate.

Assuming the banks pass on the cut, anecdotally the reduction will see an extra $50 per month in the purse of a home owner based on a $300,000 mortgage. Whilst this may not seem a lot, when you take into consideration the RBA’s consecutive, previous cuts interest rates have never been lower.

With interest rates at record lows a number of questions about the health of the Australian economy, economic growth, business confidence that underpins investment and Australia’s position in the global economy have been raised.

At the height of the Global Financial Crisis, interest rates were savaged in response to global concerns threatening our local economy, going from 7% but even at the height of this turmoil our present day interest rates are set at a lower rate. This begs the question(s); are interest rate levels an effective measure of today’s economic conditions and is Australia’s present day capacity to deal with such challenges weaker that what they were at the point in time of the GFC?

In terms of whether Australia has the capacity to weather the economic challenges as they present and whether the short term outlook is a positive one, the answer is a resounding no, according to some social commentators. According to some sections of the media, the future looks bleak indeed with the resources boom officially at an end, tax hikes on the horizon and a government in caretaker mode with presumably little focus on good government and more emphasis on retaining government.

It seems also that small business, the largest employer within Australia, is suffering a lack of confidence if new job advertisements are any indicator. Electrical prices, labour costs and red tape have all been cited as reasons for small businesses going to the wall.

Even though the intention of lowering interest rates is to provide stimulus, an unfortunate consequence is that self-funded retirees receive less income. Broadly speaking, self-funded retirees have gone from living reasonably comfortably to just making ends meet. With less uncommitted income our aging population’s ability to contribute to the economy has been stymied somewhat, placing increased pressure generations x and y to fund economic activity.

Adding to the complexity of the issue is the growing unemployment rate. Labour intensive sectors such as retail, finance and construction are all feeling pressure to remain competitive and relevant under extremely difficult trading conditions.

Another barometer which measures the health of the economy is the number of people going bankrupt or insolvent. According to the Insolvency and Trustee Service of Australia ("ITSA") Statistics, bankruptcies and personal insolvency are actually down on last year.

According to Grant O’Donnell of Debt Fix Pty Ltd, one of Australia’s largest debt solution providers, all indicators suggest that bankruptcy numbers are likely to increase, "It’s not unusual to see bankruptcy figures lag behind economic activity and once the present day conditions are allowed time to filter down to households or the "real" economy, bankruptcy figures will almost certainly spike."

Bankruptcy should be a last resort but for many, it provides necessary relief. Mr O’Donnell said, "Like any option to deal with unmanageable debt, bankruptcy presents benefits and consequences and it’s important that debtors receive advice from only trusted professionals that can guide them through the process."

According to Mr O’Donnell, debtors should keep the lines of communication open with their creditors; "Despite what you may think, bankruptcy presents very little commercial benefit for creditors, it’s therefore within their best interests to prevent this. You should always speak with your creditors first as they have access to a range of in-house solutions."

So what can people do if they find themselves in a situation where they are struggling to make ends meet and they would prefer not to go bankrupt? Mr O’Donnell says, "The Commonwealth introduced the Debt Agreement scheme some time ago to provide debtor’s with an alternative to bankruptcy. Through the Debt Agreement Scheme, debtors can make an affordable offer to their creditor’s to settle their debts one and for all over a short period of time. Interest is frozen and debt collection stops providing debtor’s a real opportunity to regain control. Naturally there are some consequences so it’s very important only Registered Debt Agreement Administrators are called upon to explain these and help examine suitability…"

For more information about Debt Help, consider contacting Debt Fix on 1300 332 834.

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Nicholas Bregozzo
Debt Fix
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