It looks like “group think” has taken over the Reserve Bank. In a prepared address to the Economic Society of Australia on Tuesday, Dr Phil (Governor Phillip Lowe) told us that the RBA is certain to cut the cash rate from 1.5% to a new record low of 1.25% when the Board next meets. “At our meeting in two weeks’ time, we will consider the case for lower interest rates”.

RBA Governors don’t deliver a message any more bluntly than this (see Peter Switzer’s assessment at, so blunt that it raises the obvious question that if it is really important to cut the cash rate, why wait the two weeks? Can’t the Board have a telephone hook-up and act now?

At the end of 2018, the RBA was telling the market that the next move in interest rates would be up, rather than down. In February, the Board assessed “that the probabilities of an interest rate increase and a decrease had become more evenly balanced than they were in 2018”. Now in May, they are going to be cut.

So, what has changed?

A few things, but not a lot. The most noteworthy was the change in tack by the US Federal Reserve, which adopted the word “patience” and killed expectations of a further two or three interest rate increases in the USA in 2019. On the domestic front, economic growth in the second half of 2018 was a little soft (although the RBA now maintains the economy will grow by 2.75% in both 2019 and 2020), and the unemployment rate ticked up very marginally to 5.2% in April. Inflation remained low, with the RBA putting the underlying rate at 1.5%.

But do these factors alone justify a cut in the cash rate from the already “emergency low” level that has been in place since August 2016? I don’t think so, but even if they do, who is going to act as a result of the cut? Will business, small or large, be motivated to borrow money to invest in new production or equipment to drive output and employment growth? Unlikely. In the housing market, where the problem is the availability of credit rather than the price of credit, will investors make a bold re-appearance? Unlikely, unless the rules around the availability of credit change.

Sure, there will be some winners, particularly consumers who are feeling mortgage stress. But  typically, when interest rates are cut, loan repayments aren’t automatically reduced (the industry term is “recast”). Rather, most consumers keep paying the same monthly amount and repay their loan a little faster.

Losers include retirees and other savers living off the interest from their term deposits and bank accounts. Their incomes are going to fall. And whereas it is always assumed that people paying  mortgages are those who need the most help, by numbers, there are more savers negatively impacted than borrowers positively impacted from a rate cut.

Dr Phil appears to be responding to the call from bank economists to lower the cash rate, led by Westpac’s Bill Evans and NAB’s Alan Oster. Almost to a man and woman, economists from our trading banks, investment banks and fund managers are singing about the need to cut the cash rate.

It looks remarkably like “group think”, the same “group think” from the political elite that told us that the ALP was going to win the election. Short on insightful analysis, long on the certainty that it is going to (and has to) happen. For the RBA and Dr Phil in particular, there is risk in acting (or not acting) outside the prevailing wisdom of the group.

If I was Dr Phil, I would be focussing on other stimuli that will drive growth. Firstly, pressuring the Government to prioritise the legislation that will deliver low and middle income earners tax relief of $1,080 for a single or $2,160 for a couple when they lodge their 2018/19 tax return. The vast chunk of these rebates will be spent and act as a very powerful stimulus.

Secondly, working with the prudential regulator APRA to make loans easier to get. On Tuesday, APRA announced plans to relax the mortgage servicing regulations. Presently, banks assess the ability of a borrower to pay interest using a rate of 7.25% (the average rate on a new loan is around 3.9%). Under APRA’s plan, this assessment rate won’t be subject to a floor but will be based off a fixed margin of 2.5%. This will see the assessment rate falling to around 6.5%, meaning more potential borrowers will be eligible for a loan and some will be able to get bigger loans.

But with all things APRA, the proposal is subject to a 4 week consultation period with submissions not due until 18 June. APRA then needs to consider the submissions, meaning that any change is unlikely to take effect until July at the earliest.

Ignore the group think about interest rates, Dr Phil. There are more direct stimuli to drive growth.