RBA Rate Decision – September 2016

The Reserve Board met today, and they’ve kept interest rates on hold. That’s after dropping the cash rate by 25 basis points last month. Now they are looking for a lead in terms of where they go next, and most people are predicting that it is going to go down. In fact, before this announcement, 38 economists were surveyed, and they all anticipated rates to be on hold because we are already in what would be considered as emergency level and uncharted territory in regards to our monetary policy.

So what are we looking for? I think internationally we are looking for leads in terms of what’s happening overseas, and all the leads are pointing to lower interest rates. We see Brexit put pressure on the UK economy, and we will probably see the UK drop interest rates. That’s also then arguing for the European Union to potentially do the same thing to shoot up confidence around that economy and the broader economic community. We see Japan also looking for further stimulus into their economy and China trying to stop the slowdown and trying to transition to a more prolonged growth level and a more sustainable level after an incredible run of rapid growth in their country. What’s bucking that trend is the US. They are in an interesting position. Their payroll data had been quite positive for the last three months although the latest release last week has been a little bit softer than most anticipated. On the whole, we’ve seen hundreds of thousands of jobs created over that period, and that’s leading to potentially the Reserve Governor there looking to raising the rates again. I think we are starting to see the coming of the time when we will see the US Federal Reserve Governor, Janet Yellen actually do something about rates between at the end of this year or early into the new year. Now she will let the marketplace know about it because they will obviously get all jittery when we are starting to see that. That will put pressure on the US Dollar and that will hopefully see the Australian Dollar comes off its high. We’ve got a very stubborn exchange rate at the moment, and we basically need to see that come down, ideally that 70 cents mark would be perfect because that will allow our economies and our exporting activity to take shape. It will also obviously mean that what we import would be slightly higher so there doesn’t seem to be the same concern around inflation as what that was when we see that negative inflation result only a couple of months ago.

So domestically the leading economy are looking quite ok. We are starting to see or we have seen some pretty good employment number. We are seeing our job numbers or unemployment sitting around 5.7% and there is definitely spare capacity and we are seeing in terms of the trending data that there are more part-time jobs being released or created as opposed to full-time jobs. But on the whole, we are feeling pretty comfortable. We’ve seen some survey on consumer sentiment and actual consumer spending has been pretty good so we are not going into our shell which is good for the economy as we try and strive and get through to the other side of this. In terms of GDP numbers, in the past, we have really focused on it in terms of how the economy is performing and the jobs that they create. But what’s going to be interesting as we gone through the phase of our mining boom and we are now coming into the production phase of that. It’s taking fewer workers to produce the same amount of cash flow positive into the economy so we are actually going to see our GDP numbers growing back to 3% – 4% but we won’t necessarily see the number of employees needed to produce that. So we are going to have to look for different measures in terms of how we are seeing unemployment drive forward. Our construction industry has been quite robust, and this is when I want to spend a bit of time. We aren’t seeing wage growth pressures at the moment, and that’s obviously tapering our inflation story. But what we see with low interest rates is property prices continue to move higher because we have a little bit of confidence on our job security at the moment.

Now I’m going to flag this as an early warning and I’ve said this a couple of months ago is this rising tide that is lifting all the ships higher in terms of our property prices is going to come to an end at some point.

The first triggers as I’ve warned you all before is going to be in that high-density apartment market where we’ll start to see prices come off there and higher vacancy rates as fewer renters going into those market. But I’m also concerned about the outer suburb areas as well. When we start to see this price growth, and we are not seeing income growth underneath that, the price will hit a ceiling. They won’t be able to grow any higher, and when the economy starts to falter, those particular prices would be exposed to a correction. This is normally what’s going to happen in terms of the market cycle. We typically always overshoot and then we come back down so it’s important that when you are picking your property, where you are going to live and what you are going to do, there is going to be some price movement most likely on the negative in some of those areas. Some of the inner city areas are still doing really well as confidence grow and income is increasing for those people living closer in and they are putting price pressure on those particular properties. So the existing three and four bedroom houses are performing really well in our major capital cities and continue to deliver very strong price value growth. Now that will ultimately come to an end at some point. When that is, it’s very hard to pick because we’ve got the economy being well managed to a point on what can be controlled. There is still some lever, a little bit of movement in the monetary policy but we still want to see fiscal policy start to take shape so that federal government needs to do and outline their agenda and start to look at that infrastructure story otherwise we are coming into a harder landing than what’s needed.

But right now, interest rates are on hold. There may be some pressure internationally to drop our rates just to keep our cash rate and the exchange rate at that competitive level. That might be the next force to force the Governor and the bank to basically move cash rate lower.

One final point goes out to Glenn Stevens. A big shoutout to you. You have done a fabulous job in managing monetary policy. You and your board should be highly commended in terms of the work you are doing. You are world class and you have navigated our economy through very tough times. The GFC is basically the worst financial meltdown event in almost a hundred years and you’ve got us through that beautifully and congratulations to you on your service to the government and also to the country because you have made household wealthier through prudent policy measures. Congratulations and enjoy your retirement. That’s it from me today.