RBA Rates Decision – December 2010

Given Glenn Stevens’ recent speech last month that he saw no reason for a further rate rise this year, it was no surprise that the cash rate remained on hold, following the RBA board meeting and cash rate announcement today.

The economists are mixed in their view of what the future holds regarding rate rises, some are predicting further rate rises in 2011 and others are of the view that this tightening cycle is coming to an end.  This month I thought I’d share with you some extracts that I pulled out of St George’s morning report, which makes for a great little snapshot of world economic and market data.  It also highlights a subtle example of how economists can change their views as new data is announced.

 

Extract from St George Morning Report – 29/11/10:

AUSTRALIA: RBA Governor Glenn Stevens presented his semi-annual testimony on Friday. The key themes in his speech were similar to prior RBA rhetoric. The RBA Governor noted that while global growth has been better than expected this year, it is anticipated to moderate to somewhere closer to trend growth in the year ahead. This would reflect fiscal tightening measures in the EU region in response to the debt crisis, tightening policies in emerging economies to prevent overheating and the fact that the major countries are still battling with the aftermath of the financial crisis. In Australia, the key theme remains the 60-year high in the terms of trade, which will provide a key boost to business investment, incomes and spending. Accordingly, inflation is unlikely to decline further from here. While the high AUD is placing a lid on inflationary pressures, growth in labour costs is rising. Although inflation is expected to remain close to the 2-3% target in the year ahead, the risks are that inflation could be too high, rather than too low.    

Interestingly, the RBA Governor highlighted that quite reasonable arguments could have been made to delay lifting rates on Melbourne Cup Day. This supports our view that rates will remain on hold for some time especially as lending rates in the broader economy are seen to now have a contractionary impact on growth. However, the very high level in the terms of trade will be a major economic stimulus in the year ahead. So the next move in rates is still likely to be up than down. We anticipate that the most likely timing for the next rate hike will be in the middle of 2011.

 

Extract from St George Morning Report – 2/12/10:

Growth in the September quarter was softer than expected, rising just 0.2%, versus consensus expectations of a 0.4% increase. Second quarter growth was also revised down to 1.1% (previously 1.2%). This saw the annual growth rate fall to 2.7%, from 3.1% previously.  Detracting from growth was net exports, after making the largest contribution in the previous quarter. Keeping this quarter’s number positive was strong growth in non-dwelling construction. Equipment expenditure fell. Household expenditure rose 0.6%. An upside surprise was a surge in agriculture output – without it GDP was negative 0.2%.

 

The wider consensus is that Australia’s GDP will go at a solid rate in 2011.  Although it’s fair to say a two tier economy might develop whereby general consumer activity will be softer as higher costs of living take hold. On the other side of the coin, mining revenues and favourable terms of trade impact positively on GDP.

My view is that we are not too far off the top of the interest rate cycle. I definitely cannot see interest rates going higher than another 1% and if they do go this high, then I cannot see this happening very quickly – it might take around two years to get there, as Australian families will really struggle to pay the bills from that point forward, which can only mean consumer spending will die and this must have a flow on effect for employment, which will be the trigger for an easing of rates.

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Note: I’m no expert and this is a personal view from my own research and reading of the economy.  More importantly, it should not be taken as advice or be the reason you make any decision regarding your money and finances.  Those decisions should be made through consultation with us, but they need to be made based on personal circumstances and objectives in mind and not just because of an opinion of mine using our money planning professional approach.