Money experts were caught off-guard yesterday when the RBA decided to keep rates on hold. Most economists were tipping another quarter of a per cent to be shaved off the existing 2.25 per cent interest rate.

But there were two strong factors opposing the cut:

  1. Cutting interest rates risked adding fuel to the housing market inferno.
  2. If business isn’t prepared to borrow at 2.25 per cent, then another quarter of a per cent won’t make any difference.

And it’s this domestic investment the RBA wants.

Business investment will create jobs, it will increase consumption, and it will kick start some much needed product innovation. All things Australia needs if the government wants constituents to reduce debt, unemployment, and reliance on government subsidies.

The gamble is that as China’s economy continues to slow Australia’s will lose more export earnings. If this happens our high dollar will slump and hopefully make those exports attractive to other markets.

But no one knows the state of those other markets: The Eurozone is locked in a bitter, protracted, and divisive struggle with Greece; the US is still struggling with unimaginable debt; Japan, on a per capita basis, makes the US debt look like some lost lunch money; while Russia, Spain, Ireland have in the last year only by the narrowest of margins avoided complete financial collapse themselves.

The clear winners – the oil producing nations of the Middle East – are themselves not so clear. One is struggling with a power vacuum after the death of their king. Others are involved (either themselves or through proxies) in damaging, draw-out, and expensive wars against home-grown insurgents.

With all this uncertainty RBA Governor Glenn Stevens could be forgiven for being cautious. Compared with many countries Australia is on an even keel. Even if that keel is pointing us towards a whirlpool of debt, we’ve still some way to go.

While many money experts predict another, possibly two, rate cuts before the end of 2015 we should all keep our eyes on the prize – Stimulating the economy and reducing debt. If cutting the interest rate won’t do either of these, it’s unlikely to be cut.

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