As I told you last week it would, the Reserve Bank officially pressed its – and Australia’s – ‘reset’ button on Tuesday.

It cut its official rate to yet another record low of 2.25 per cent. It all-but signalled it would probably cut again. Most of the banks quickly followed in cutting their home loan rates. They’ve already been cutting their deposit rates and they’ll now cut them even further.

This might be all good news for anyone with a home loan or wanting to get one – although it could also be a dangerous trap for some of those potential borrowers. But it’s also, suck on it savers.

Why do I say a potential trap? It could encourage young – or even not so-young – homeseekers to over-borrow to buy an overpriced property.

Let me explain the possible potential maths. You go whoopee now I can afford a $400,000 loan (to buy, say, a $500,000 house); my repayments might now be just $1800 or so a month (don’t take those numbers as gospel, I’m just using a rough calculation to explain the risk).

If interest rates were to return to anywhere near ‘normal’ levels, you could find your repayments suddenly leaping to, say, $2500-2600 a month. And if you then tried to sell your house you might find you could only get, say, $430,000-450,000, plus costs.

It’s important to understand the RBA is not wildly enthusiastic about cutting. It’s sympathetic to the plight of savers. On a more basic level it’s twitchy about this ‘grand experiment’ of super-low rates that the world has embarked on.

I grew up in a world in which 3 per cent (real, after inflation) was considered the appropriate base for rates – the so-called ‘riskless rate of return’. That would provide the right signals for savers, for consumers, for investors to get a healthy growing economy.

Well, we are not going back there anytime soon. On Friday the RBA laid out why it cut and charted a road map for the future. Or at least, for the rest of the year.

There are two broad reasons for the cut. And one of them is not what’s going on in Canberra – despite some very silly commentary I read in the Saturday papers.

It has also got absolutely nothing to do with what might or might not be in the Budget.

The first is the global environment – those zero interest rates in the major economies like the US and Europe and their massive money printing which has poured literally trillions into global markets looking for a yield.

The second is the post-boom outlook for our own economy.

The RBA – like everybody else – has been waiting for the non-resources side of the economy (which, to remind everyone, is the overwhelming 80 per cent plus of the economy) to pick up the slack.

We are still waiting. Whereas last year, you might have been able to say – give it time; it’ll happen soon, especially when a lower Aussie dollar helps; that now looks increasingly unlikely or far too distant.

So even with that lower Aussie dollar – at least against the US dollar, dropping below US80c – and the big boost to consumer spending power from lower petrol prices; the RBA felt it had no choice but to cut and probably will have to do it again.

It’s projecting that inflation will stay at the bottom end of its 2-3 per cent target range and that growth in the economy will be sluggish. That’s a mix of resources going backwards and the rest staying relatively slow.

The first opened the door to a cut, maybe cuts; the second all but forced it to walk through.

It’s important to understand that those forecasts are made after factoring in the lower Aussie dollar and oil price and this and another cut to rates.

Now the RBA knows better than most that even at the best, the most ‘predictable’, of times, it doesn’t possess some magic gift of collective foresight.

So don’t assume that its forecasts will come true. More importantly, understand that it most certainly doesn’t either.

Critically while it tries to look all the way through the year, it will make every decision, one at a time from monthly board meeting to the next.

Apart from the fact that it’s the closest thing we’ve still got left as an objective, agenda-free organisation, this is the best thing it’s got going for it. That flexibility – and a willingness to admit it might have got something wrong and so change course.

I’ve been trying to get across we face a likely volatile, unpredictable year ahead.

That’s not the same thing as saying it’s going to be bad, but it will be challenging.

The RBA effectively signed on to that view. But it also told us it was ready to (try to) meet that challenge.

Posted by Terry McCrann – Herald Sun on 8th February, 2015