RBA Rate Decision – February 2015 – Why did they drop 25 basis points?

So why did the Reserve Bank of Australia (RBA) moved on interest rates this month when most commentators including myself actually thought it would stay at the 2.5% cash rate. The 25 basis points reduction to 2.25%- what’s behind that?

Well, the story is around our currency and we really need to get our currency lower. I think you’ll find the RBA and the Board will start to talk more about where they want to see the currency based on what big factor and that is the oil price and the price for commodities at the moment. Let me explain that in more details. We’ve seen around the 60% reduction in the oil price since early December, now its come back up around 15% but in reality what it actually means for Australia is; we’re a net exporter of energy.We’ve got coal, natural gas and we export that to produce energy for other nations. Now, when the oil price comes down, it potentially affects that net export. When that happens, it also reduces the price for other commodities. When you’ve got that reduction in price considering most trading is done in US Dollars. When the Reserve Bank is talking about wanting to see the Australian dollar around that 75cents mark, they were factoring in the value of those commodities to be higher which means that the net income coming into Australia is better for our GDP numbers. When you reduced that significantly, what actually happens? It means that we need to export more and that’s not necessarily possible given the capacity constraints that you might have. So this rate cut is all about bringing the currency down. Now, the moment the rate cut happened, we saw the currency dropped around 4 cents. So we might actually hear some commentaries from Glenn Stevens trying to get the US Dollar or our peg to the US Dollar to around 70 cents instead of 75 cents. That’s all boding well for hopefully, even lower interest rates this side of Christmas which again is a little bit of surprise for me because from my point of view, I’ve been looking at the building approvals and the construction led recovery that was being talked about and we are definitely seeing it in terms of the residential planning approvals. We’ve seen nearly 200,000 approvals and that’s future construction that is going to happen which is going to create jobs in the construction industry. But what we are seeing in the non-residential side is a decline in approvals and that’s telling us about business confidence. We are also seeing this in the business confidence survey is that they are not confident yet. They just don’t have the sentiment shift to invest that money. So by making monetary policy cheaper, it’s going to allow them to actually get some confidence around borrowing money to invest it back into their business. When you invest it back into the business, it usually means you need human resources which is employee coming in. That’s the other story here. It’s the unemployment story. We saw unemployment trending higher in the second half of 2014 but we saw a surprise result in the December numbers around unemployment numbers actually fell. But generally speaking, the Reserve Governor and the Board are feeling that the momentum in the economy is swaying. Consumer sentiment is also showing that as well. So this stimulus considering fiscal policies are actually well in trend then effectively, this means that they can pull the monetary policy lever and that is exactly what they’ve done.

Great news for consumers and for those of us who have mortgages.

The message to you guys is this is a wonderful time to pay down more of your mortgage or it is a very very good time to look at investments. Now, what I mean by investment is if you can only get 2.5% or 3% in the term deposits and with the equity market quite unstable and volatile at the moment considering what’s going on around the world, then property investment could also be a consideration for you. I’ve got to add, if we do see property values sky rocketing higher, they would be other measures which the RBA and APRA will put in place so we won’t see a situation where we overcooked the property market but I will say that 2015 could become a story of chasing property yield as opposed to growth. This means that some of the bigger cities won’t have that because the value is growing so quickly that the yields aren’t coming in behind it. So we will be looking at other locations to chase that yield. When we are talking about the cost of money and borrowing in that sort of mid 4% – 4.5% range, it’s very attractive right now especially when you are getting 6% – 7% in some of these locations.

So all in all, now sort of sets the benchmark to say that the RBA is willing to ease. They look at all kind of economic indicators. They’ve got inflation under control so they got the lever to pull, so they did it and they may do it again. For me, it is a little bit of a surprise but I’m getting on board now in understanding that they are looking at the actual net income impact of this whole oil and commodity story and they are seeing do need to drive that income to get GDP numbers in the right direction.

Thanks for watching.

 

(Those people watching/reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)