With the cash rate celebrating its 2nd birthday of staying at 1.5%, Pelican spoke with a few UWA Economics academics to get to the bottom of some hard-hitting questions. The responses may surprise you.
Why should students know about and care about the cash rate?
Ingebjorg Kristoffersen: For the same reason that they should care about the unemployment rate and house prices. It’s a good barometer for how the economy is going. The cash rate affects your wallet if you’ve got a mortgage already (you don’t? Your parents probably do, which means it might affect your supply of inter-generational capital – your parents’ willingness to lend you cash. There is nowhere to hide!). It also affects businesses’ ability to undertake new projects, and thereby the number of jobs on the market. So even Arts students have cause to care about the cash rate.
Leandro Magnusson: Students should know because they want to know the size and location of the house that they will be living in.
Alison Preston: If you don’t know or care about the cash rate then the chances are you have poor financial literacy and that’s a serious matter since studies show that those with poor financial literacy accumulate less wealth, have lower savings and pay higher interest rates on bank loans. Recent data for Australia from the HILDA survey shows that young people (15-24) have the lowest levels of financial literacy in Australia.
Survey respondents were asked the following question “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?” Only 55% of young (aged 15-24) men were able to correctly answer this question. The share of young women correctly answering it was much lower at 35%. This is a real worry. [The correct answer is less than today]
Kenneth Clements: If you want to get (and hold down) a job, you need to know about the activities of the RBA and the cash rate.
How would you explain the cash rate to someone on a date you were trying to impress?
Michael McLure: I would probably say that the RBA considers the underlying rate of inflation, not the headline rate of inflation, when making its decision on the cash rate [note: as I have not had a date in more than 35 years, it might be a bit risky to follow my suggestion if your expectations for an enjoyable date are high!]
Alison: I’m not sure this would be my choice chat-up line!
Ingebjorg: So basically, if you were the economy and I were the central bank, I’d have to increase the cash rate like a million percent right now…. [THEN you explain what that means, and the deal should be closed pretty quickly. If not, your date is a total dud – move on!]
Kenneth: Because the cash rate is so low, I can get a loan to pay for this.
Leandro: I will skip it. I do not want to lose my date.
How would you explain the cash rate to Arts students?
Andrew Williams: I would start with “Assume you had some money to invest…”
Ingebjorg: With handpuppets, at the tav, using the bar as my stage. See below for suggested script.
Puppet 1 (=the economy): Maaaaate, I’m feeling sluggish… Nothing’s going on!
Puppet 2 (=the central bank): Darling, what you need is a hit of caffeine! Here, get this down your neck, quick-smart! [hands the economy a double espresso, and turns to the audience to explain:] Boys and girls, this is an analogy for lowering the cash rate!
Puppet 1: [Glug!] Thanks, I feel so much better now! Full of beans, you might say! OK, I’m off to dig out some lithium in the outback now. See yah! [runs away and disappears behind the bar]
[later on, sound of kettle coming to the boil and starting to whistle]
Puppet 2: Hey, mate! You’re digging too fast, OK? Need to slow down! If you don’t the price of pints will go up too fast! Let’s chill a bit – here, have a glass of wine on the house. [Turns to the audience and explains:] This is like the central bank telling the economy the cash rate might have to rise soon if things don’t slow down.
Puppet 1: Nah, you’re talkin’ rubbish, mate! I’m totally fine [steam coming out of handpuppet-ears, runs away again]
Puppet 2: Darling? … Hey! HEEEEYYYY!!! [mutters] Bloody economy. There it goes again… [turns around shouting at invisible third handpuppet] OK, time to get the tranquiliser gun out again! [Sharp crack, turns to explain to the audience:] Half a percent ought to do it, but we can always increase the dosage next month if need be.
[I know this is too long but I’m procrastinating from writing up lecture notes for ECON2271]
Leandro: It is the difference between buying a Van Gogh when he was alive and when he was dead.
How would you explain the cash rate to a young child (your child if you have one!)
Michael: The cash rate is the average amount of money, in cents, that the main bank in Australia gives to other banks for every dollar they leave with the main bank overnight during the course of a year. The main bank pays for these ‘overnight’ funds because its bankers want to play with money overnight.
Andrew: When my kids were very young, I used to explain economic principles to them to get them to sleep. Economics is great for insomnia, worked every time.
Leandro: Son, when the cash rate goes up it means dad cares more about your future than my life. When cash rate goes down, dad parties more and cares less about your future.
What birthday wish do you have for the cash rate on it’s second birthday?
Michael: Many ‘happy returns’ in the future.
Andrew: I’d buy the cash rate a t-shirt
Kenneth: You haven’t changed at all – I hope you are the same this time next year.
Alison: I’m not sure about the second birthday bit. Anyway, I checked the web for ideas on birthday wishes for second birthdays and I liked the following suggestion “Let your world be filled with unicorns and rainbows”.
What are at least three other things that haven’t changed in two years?
- Attendance in lectures
- Australia’s record for uninterrupted economic growth
- The clocks (daylight saving) in WA
- Our real wages (when was the last time we got a real increase in wages?)
- Our Prime Minister
- My spouse
- My fashion sense
- Pi (π)
- The poor quality of my answers to students’ questions.
- Students’ propensity to ask about things that have already been clearly explained on LMS.
- Staff turnover in the Trump Administration?
- My intention to begin a new and better life.
- Transperth punctuality
- Freo’s dismal footy performances
- NBN internet speed.
- The AUD/USD exchange rate.
- My salary.
Ingebjorg Kristoffersen: Dr, BBus MBus E.Cowan. PhD W.Aust. Currently teaches ECON1111 Quantitative Methods for Business and Economics; ECON1101 Microeconomics: Prices and Markets; ECON2271 Business Econometrics; and ECON5514 Economic Research and Evaluation Methods at UWA.
Andrew Williams: Dr, BEc PhD W.Aust. Currently teaches ECON1101 Microeconomics, Prices and Markets at UWA.
Leandro Magnusson: Dr, BA(Econ) MA(Econ) Sao Paulo, PhD Brown. Currently teaches Econometrics: Applied Advanced Econometrics (ECON 4413/5513); Business Econometrics (ECON 2271); and
Quantitative Methods: Quantitative Methods for Business and Economics (ECON 1111) at UWA.
Alison Preston: Professor, BA (Hon) Strath., MBA Curtin, PhD W.Aust. Currently teaches ECON5516 The Economics of Public Policy
Michael McLure: Professor, BA Murd., GradDipEd WAIT, MEc W.Aust., PhD Curtin. Currently teaches Public Economics 4405; History of Economic Ideas, ECON3310; History of Economic Thought, ECON4507; and Monetary Economics, ECON3210 at UWA
Kenneth Clements: Professor, BEc MEc Monash, PhD Chic., FASSA. Currently teaches International Finance and Markets ECON4415 and ECON5502 at UWA