Little room left to move if a crisis hits

For every saying offering sage guidance, there is almost always another one offering completely different advice.

If at first you don’t succeed, try, try again is contradicted by the saying that the definition of insanity is doing the same thing over and over again, but expecting different results.

When it comes to interest rate setting by our Reserve Bank, I really wish the board had followed the second piece of advice. Here’s the thing: business investment is clearly stubbornly unresponsive to lower interest rates.

Sluggish business investment is a problem here and in many developed economies.

Pushing interest rates to historically low levels and expecting business investment to magically pick up just looks insane, particularly as there is so little room to move in terms of interest rates should economic conditions significantly deteriorate (we are just running a bit below par at the ­moment).

There is also the point that many potential investors are spooked by historically low interest rates: things must be really bad, it’s not a good time to invest is the take-home message.

Equally inexplicable is the bank’s hope that the value of the Australian dollar could fall, in real terms, with lower interest rates. Let’s face it, the Australian dollar is still predominantly a commodity currency.

And with all the pushing and shoving going on overseas as big countries engage in a competitive devaluation contest, we are just part of the collateral damage. But it’s not a game we should play.

And what’s so wrong about inflation of 1 per cent? Of course, it’s not the lived experience for many people, particularly older folk, as they face 6 per cent increases in their private health insurance premiums and large increases in utility bills.

So what does the Reserve Bank expect to achieve by cutting the cash rate by 25 basis points?

After all, low interest rates push up debt-fuelled prices of existing assets, most noticeably domestic real estate.

But for retired people, every cut to the cash rate makes life a little more difficult. After all, older people are advised to reweight their portfolios as they age, to reduce the risk exposure. This must invariably mean more interest-bearing securities. But each time the RBA reduces the cash rate, the return that retired people can earn falls even further.

There are several messages in recent events for our Treasurer. Scott Morrison is well advised to speak more carefully about future movements in interest rates lest he is seen to be interfering in the independence of the RBA.

And with his radical measures to increase tax on superannuation still on the table, he needs to factor in the increasing difficulty that self-funded retirees (and others reliant on interest income) are having without being hit with higher taxes.