It’s a promise! The RBA will keep the cash rate at 0.1% for three years! Economists and economics commentators have never heard a central bank boss, like Dr. Phil Lowe, make such an undertaking.

Can you trust it? Well, that’s debateable. I’d say it’s a bit like the way George Costanza (from the TV program Seinfeld) saw a lie. “It's not a lie if YOU believe it.” And that’s what Dr Phil would be thinking right now. But if inflation should surge in two years’ time and house prices boom to ridiculous levels, then Dr Phil might be forced to welch on his promise.

For now, it’s great news for borrowers, telling us interest rates are on hold for three years. This will build confidence for homebuyers to start looking and demanding newly-built properties, or existing properties that will need renovations, which will be good for the economy. And that’s the Reserve Bank’s goal — to get the economy demanding, building, producing and growing.

And it will work because we have effectively controlled the Coronavirus unlike many economies of the world, which collectively will slow the global recovery down in 2021.

Christine Lagarde, boss of the European Central Bank, said this only a few days ago about the Euro area: “It’s losing momentum more rapidly than was expected” and she hinted more stimulus would be coming in December.

However, this excessive encouragement for spenders is bad news for savers, as it means they have to cop less interest on their government-guaranteed deposits. This means they have to make one of these decisions:
1. Live on less.

2. Reduce their retirement nest egg faster than they’d want to.

3. Take on more risk! The bottom line lesson for those in this boat is that if the return or interest rate promised on an investment product is more than a term deposit interest rate, then it’s more risky than a government-guaranteed term deposit up to $250,000. And a related lesson has to be this: if you take on risk and expose yourself to the stock market or bond funds, you must stick to quality.

Savers desperate to see higher interest rates have to hope that this huge breakable promise of Dr Lowe and the huge $213.7 billion Budget Deficit of Treasurer Josh Frydenberg works, because if they produce bigger-than-expected economic growth, then inflation will eventually kick up. And that’s when the RBA might have to work out a way to weasel out of this promise.

Be clear on this: both the Governor of the Big Bank and the nation’s Treasurer are doing the right thing. They’re not engaging in half-hearted measures that could leave some countries in a big economic hole.

This table shows how the Federal Government’s commitment to spend is the biggest in the world (as a percentage of Gross Domestic Product), except for Qatar!

The table below shows what we and others are spending.

Source: BIS Oxford Economics

Ultimately, the economic recovery of 2021 will be heavily dependent on the arrival of a vaccine and the size of additional stimulus pumped out by various countries around the world. And their central banks will be throwing the kitchen sink at their economies, just like Dr. Phil.

Australia’s in the box seat as internationally respected economist Warwick McKibbin from the ANU explained in the AFR today. “Australia’s public health and economic policy responses to the COVID-19 pandemic are the envy of much of the world,” he revealed. “The fiscal and monetary packages that were quickly put in place played a critical role in stabilising the sharp contraction.”

Economists can be very bitchy when it comes to assessing the work of other economists, but McKibbin has given Dr Phil’s work the thumbs up.

All we need are our borders to open up to ensure that we can keep growing fast enough to absorb a lot of the near million people now out of work, and those who might be jobless when JobKeeper goes in March.

Over the next five months, if our borders open and a vaccine arrives, then Australia will see a huge surge in growth, even faster than the Treasurer’s forecast of 4.25% for 2021.

The faster the growth that we register and the quicker Aussies find work, the sooner Dr Phil will have to work out how he’ll explain his need to break his promise! It’s the broken promise we have to have. Anyone overborrowed should look long and hard at 5-year fixed rate home loans, which are as low as 2.53% at lenders such as UBank.