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Ben Kingsley Blog post by Ben Kingsley

UPDATE: Monetary & Fiscal Stimulus Program

Hi, Ben Kingsley here, Managing Director of Empower Wealth and also the co-host of The Property Couch Podcast. In this update I’m going to be talking about three clear areas.

The first one is the RBA’s Monetary Policy Stimulus Program. I’m also going to be talking about the Government’s Stimulus Package, their second round. And finally I’m going to be talking about what the lenders are doing to basically help you get through this difficult period.

Now as a bit of a backstory.

Firstly, obviously the coronavirus over the last couple of weeks, has had a significant impact. The pandemic has really started to bring about lots of fear and panic and that’s also shown up in terms of what’s happened on the financial markets. So we did see, over the last couple of weeks, a real freezing of those financial markets as their, what we call, this flight to safety. And that safety is actually cash. So everyone was getting out of the equity markets, everyone was getting out of the bond markets and basically cash was king.

And so with that as a background, what we did see is a coordinated effort, not only here in Australia, but also globally from all the Federal Reserves and the Reserve Banks and all of the people in control of liquidity and money, also take pretty immediate actions to try and shore up liquidity. And so with that backdrop, I’m just going to play a couple of minutes in regards to what the Governor, Dr Philip Lowe, had to say at the press conference when he announced his stimulus program in regards to monetary policy. So let’s go to the Governor now to listen to what he had to say.

(START OF INTERVIEW)

We are clearly living in extraordinary and challenging times, the coronavirus is first and foremost a very major public health issue, but it’s also become a major economic problem and it’s having deep ramifications for financial systems right around the world. The closure of borders and social distancing measures are affecting us all and they’re changing the way that we’re living. Understandably, our communities and our financial markets are both having trouble dealing with a risk they haven’t seen before and a rapidly unfolding situation. As our country manages this difficult situation though, it’s important that we do not lose sight of the fact that we will come through this.

At some point the virus will be contained and our economy and our financial markets will recover and things will return to normal. Undeniably, what we are facing today is a very serious situation, but it’s also something that’s temporary.

As we deal with it as best we can, we also need to look to the other side, when things do recover. When we do get to the other side, all those fundamentals that have made Australia such a successful, and prosperous, and fantastic country will still be there. I think we need to remember that. To help us get to the other side though we need a bridge, without that bridge there will be damage, some of which will be permanent to the economy and to people’s lives. And building that bridge requires a concerted team effort with us all pulling together in the country’s interests. On the economic front, as you heard the Prime Minister say just a few minutes ago, there is very close policy coordination between the Australian Government, the Australian Treasury, the Reserve Bank of Australia and Australia’s financial institutions. We’re in very close contact with one another and working very constructively together and will continue to do so. And that coordination was evident in the various policy statements that you saw this afternoon.

Governments across Australia are playing their important role in building that bridge to the recovery, with the various fiscal initiatives from the Australian and State Governments providing very welcome support.

Rightly, the focus is on supporting businesses and households who will suffer major hits to their incomes.

It’s increasingly clear that further help will be required on this front and the Australian Government has indicated that additional policy measures will be announced shortly. Australian public finances are in very good shape and the country’s history of prudent fiscal management gives us the capacity to respond right now.

The banks too have an important role to play in building the bridge to the recovery by supporting their customers. Without this support, it will be harder for us all to get to the other side in reasonable shape. Australia has a strong financial system which is well placed to provide the needed support to businesses and households. The system has strong capital and liquidity positions and our financial systems have invested heavily in their resilience.

As APRA confirmed this afternoon, a public statement, the current large buffers of capital and liquidity in the system are able to use to support ongoing lending in the economy.

The financial regulators also confirmed that they’re examining how the timing of various regulatory initiatives can be adjusted to allow financial institutions to concentrate on their businesses and to work with their customers. APRA and ASIC also both stand ready to assist institutions work through regulatory issues arising from the virus. The Council of Financial Regulators is meeting again tomorrow. And it will also meet with the largest lenders in the country to discuss how they can support their customers and whether there are further regulatory initiatives that could be taken.

So I’ll talk about those regulatory initiatives that will be taken around responsible lending and best interest duty. But I’ll also talk about what the banks are doing, in a minute. But I wanted to focus in pretty much on what the core message here from the Governor was, and also highlighting some of his underlying messages. He talked about, we will come through this. That the economy and the financial markets will actually recover. This is only temporary and we need to remember that. We can get caught up in this sort of panic and uncertainty, and it’s very hard for the economy and people who are investing to understand what asset risk we have here. And that’s why the Governor and all of these financial institutions around the world are basically getting into a position to ensure that there is liquidity in those markets.

(END OF INTERVIEW)

So what’s the Governor’s focus?

What are the Reserve Bank trying to do? Well, they’re building this bridge, as he refers to it, to focus in on businesses, to focus in on their jobs, and also focus in on the incomes that are going to come from those jobs, because we all have ongoing commitments. And so part of the package, there were four main things that he was focusing in on.

Cash rate cut to 0.25%

Yes, the cash rate went from 0.5 of 1% down to 0.25 of 1%, and this is really important so I want to labor on this particular point here. The change of that cash rate now down to 0.25%, and the signaling from the Governor in regards to… It is going to stay at this position until we achieve full employment, which is around 4.5% unemployment, and also inflation between 2% and 3%.

That’s signaling to the market that money is going to be very, very cheap until such time as we have a booming economy. And he was talking about that is happening inside, say, a three year period is what they’re forecasting. But that’s not to say that it’s going to take three years to get there. But if in three years we’ve got unemployment at 4.25% and we’ve got inflation running at two to 3%, we have a booming economy and that point is when they’ll say they’ll start to move the cash rate up. So money is going to be cheap for consumers and individuals who are holding mortgages and also personal loans and so forth.

Plans on suppressing 3-year bond yield

The other important and critical point here is, when we did see this flight towards cash, we saw the bond markets also freezing up. So they were getting money out of the bond markets as well, so bond yields were going higher. Hence they’ve focused in on the entire yield curve, but they’ve really focused in on the three year bond yield.

And why have they focused in on that? That’s because most interest rates are set off that three year bond yield. So they basically signal to the market again that their intentions is to get that yield back down to 0.25. Now, at the time of the message coming out, that bond yield was sitting at around 0.47, 0.48. That is now down to around the 0.27, 0.25 area. So they’ve done a good job in signaling to the market that’s where they want to see that price range for that particular rate.

$90 billion Economic Stimulus Package

The other two things, that they did is they allowed $90 billion. So they’ve set aside $90 billion to provide to lenders, the banks and lenders, to go out there and lend that money. And to stimulate the economy in terms of business moving forward. And I’ll talk to you more about what the banks are going to be doing in that particular space. But that’s $90 billion available to lend at, which was the final point, a very, very cheap rate.

Updating the Exchange Settlement Balances to 10 b.p.

They’re also passing on that money at levels that they’ve never passed that money on before. Now that’s really important for our retail banks because that means that their margin will improve. Because some of those loans will go bad, we understand that, some businesses will fail, some households won’t be able to meet their commitments.

And so from that point of view, that’s exactly why they’ve said, “Here’s some really cheap money and we’ll incentivize that money coming through to you. So if you keep lending that money, you’ll get even cheaper money each time you come back, and you can improve your margin.” Which means that you’ve got good profitability and obviously it stabilizes your business when it’s being obviously critiqued every day on the stock markets, such as our big four banks, and credit unions, and the like are critiqued every day. That’s their job. Their job is monetary policy and is now set in train.

What we’ve also heard from Governor Philip Lowe’s address was that they’re in a position to say, “Whatever it takes.” So is the Bank of England and so are all of the other regulators in terms of monetary policy around the world. They are in this to ensure that we don’t bottom out really hard because if we did that would not be a recession, which is where we’re going, but more of a deep recession, and that is obviously not beneficial to anyone’s prosperity and job prospects. So that’s the first thing that they’ve done.

Second Stimulus Package

Now I want to turn to the announcement that we saw on Thursday, we saw over the weekend, the Second Stimulus Package come through from the Federal Government.

And what we saw in that was a two pronged attack. They’re still very much working on trying to ensure businesses continue to keep people employed, and that’s critical. There is lots of stimulus going around for businesses, just like mine and our teams here, in terms of how we can make sure that you’ve got enough cashflow to keep paying wages. And so, if we can continue to keep people employed, then ultimately the recovery will be a lot more rapid, than if we actually have to lay people off, and then there’s that grinding, slow recovery period. So, there’s a lot going on there.

But obviously I’m more interested on the consumer side and the household side.

What have we seen in regards to individuals and households?

Well, we did see that if you are temporarily unemployed, so in other words, if a business that you’re working for says, “Look, I have to lay you off, but not make you redundant,” then you would be eligible to receive what they call the JobSeeker Payments.

What they’ve done is they’ve started the original job starts allowance, which is $550 per fortnight, they have doubled that, that’s called a JobSeeker Payment, and that payment’s going to be in play for up to six months. So effectively, instead of getting $550 a fortnight, you’re now going to get $1,100 a fortnight. Now there are some conditions on that in terms of who it’s going to be paid to, single person, double household, those types of things, and where those payments are going to come through. So make sure you do some checking around whether you’re eligible or not to be able to go to www.myGov.au and that will have all that information for you.

In addition to that, is for lower income households. There’s 6.5 million Australians who are getting two payments. So they’re getting a $750 initial payment which will potentially flow straight into the economy, and that first payment will be on the 31st of March. In addition to that, they’ll get a second payment on the 13th of July. And so that money will be available to them through the payments that they would normally get. So if you’re a social security, veterans, other income support recipients, and eligible concession card holders, they will be, including Newstart will also receive that.

Now what’s important to also understand though, if you are getting the JobSeeker allowance, then you won’t get the second payment. Because you’re going to get $550 a fortnight, so they’re not going to give you the $750 plus the $550 every fortnight. So that’s really important. And I understand, in terms of most households, if you do have cashflow issues, which is really what this is about in terms of making sure people don’t get into financial distress.

The other option that they’ve also considered is to getting access to your money, which is your superannuation. So effectively on this side of 30 June, you will be able to access $10,000 out of your super fund to be able to use to continue to keep the lights on and pay the bills. And on the other side of 30 June, i.e. one July, you will also be able to apply for those funds.

Now there are some conditions, it’s not just everyone can go and grab $10,000 or $20,000 out of their super fund.

Those conditions would line up with the JobSeeker allowances and your current financial position to be able to access those funds. So don’t think it’s a free for all, and you’d be crazy taking your money out of super if you don’t need it right now. That is part of your nest egg, which is going to be important for your future wellbeing as you get older. So it’s really important to understand that. They’re the main features of the current program in regards to what that looks like in addition to obviously the small business stuff that I was talking to you about.

And now, what are the lenders doing?

So the lenders are also playing their role, they understand that it’s a coordinated approach between monetary policy and fiscal policy, which is what the Governor announced through their Stimulus Package, and also them being able to lend that money out into the economy.

And so we see it on the small business and business side, that responsible lending obligations and some of the credit policies that may apply in terms of compliance, APRA and ASIC and those regulators are taking a commonsense approach to these uncertain times. That will mean that there will be lending that’s going on to be able to support those businesses for the short term.

In addition to that, as I focus in on households, it’s really important to understand what the banks have announced. So not only did they announce a repayment holiday for businesses, so up to six months for businesses, they’ve also said that if you are experiencing financial hardship, then one of the things you must do is call us. Just get in contact with us because they have a suite of options, which is what I wanted to highlight to you right now in regards to what may be possible for you.

So the first thing they’re going to do is have a look at your accounts and see if you’ve got any available redraw. And so rather than having to make regular payments, if you’ve got redraw, you can work down that redraw.

If you’ve got the offset account, which is what we talk about everyone, and this is what we’ve always said, liquidity is king.

Then, we won’t need to add anything more to that if you don’t need to. They’ll just take the money out of the offset account or they’ll take it out of redraw. That’s the first step. So really if that is the case, there’s nothing to see here, you’re going to be fine for the short to medium term.

In terms of the next option they’ve got is they might be talking about, “Well maybe we do a reduced repayment as opposed to no repayment at all.” So you might be able to work out that if your repayments are $3,500 a month, maybe that needs to be $1,500 a month for these uncertain periods, and that could be set for a period of three months as a starting point, and then they can revisit that in due course.

The other option you’ve also potentially got is having a pause where you might switch to interest only for a period of time where you’re just paying the interest and not necessarily the principal. So they are adjustments to your overall mortgage program.

And of course the final one, obviously, which is the most cashflow sensitive one, is a repayment pause. Which means effectively you’re not going to make any repayments at all for a period of time to allow you to make sure that you can make all your other commitments for that period of time. So there’s a couple of things to understand when you are making repayment holidays, and that is that any interest that you are not paying in that time will just be capitalized into the loan, and that will need to be repaid. And what will also happen is that your loan will be adjusted.

So if you’ve got, say, a 25 year loan or a 30 year loan term, and you take a three month repayment holiday, then your loan term will be reset to 30 years and three months. And so there will be some paperwork, some subsequent paperwork that will come out to you in regards to that, with some letters instructing what your new repayment’s going to be for that time period. So stay close to your bank if you’re experiencing that particular situation.

The final thing I want to also note to people who think that, “Oh, this is going to interrupt my credit score.”

So we have positive credit scoring here in Australia now, post the GFC. So we do know that the banks are working in with the credit agencies and this will have no impact on your credit score. Now that will take a little time to iron out and get all of that right, but effectively, if you contacted your lender then they will have that on record and effectively that won’t impact your credit score. And if it does, it’ll just need to be adjusted, there’ll be some administrative work there, but it shouldn’t. But what they are flagging is that might take a while, so early into the new year where they will tidy all of that up, obviously, so we can get through this next three to six months. So that’s what it looks like for those people who may be experiencing cashflow challenges around now.

My final message goes out to, and it always does, is to those people who may be in a position to actually do something now around their financial transformation journey.

If you are in a solid financial position, this is a time where you are potentially buying businesses that are very, very well priced in terms of the historical performance of those businesses. Yes, I’m talking about stocks and shares.

That may be a consideration for you. Getting a review of your super may be a consideration to you, that’s also something to think about.

And then finally, on the property side, there will be transactions that will continue until such time as we hear of a full lockout. But what’s going to happen is it’ll be a different norm. The new norm for this short period of time will be transactions that’ll be done a lot via phone, a lot via video conferencing, a lot via DocuSign, which is electronic signatures on contracts of sale and those types of things. The market is still open from a property point of view and we’ll be doing more updates on that in our upcoming podcast this Thursday, we will have a Q&A session where we will take a deeper dive into that.

So for the latest information, make sure you do check out The Property Couch Podcast, where Bryce and I delve into those questions and talk about the potential scenarios in terms of how we see them moving forward.

Yes, we’ve had corrections and challenges before, the early recession of the ’80s, the ’87 crash, the recession of the ’90s, the Asian currency crises, the dot-com bubble, the GFC, you name it, the property market has been through it.

And again, just referring back to what Governor Philip Lowe has talked about, it is only temporary. Once we start to see a containment and a treatment program, I suspect you’ll see, as soon as that type of numbers start to come out, you’ll see probably a very positive response on the share market given everyone’s gone to cash. They’re waiting for the right time to redeploy that money where they’re going to get a better return than cash. And the same for the property market.

When we see Governor Lowe talking about, and signaling to the market, that he doesn’t see the cash rate moving for the next three years until unemployment gets down to 4.5% and inflation gets between the two to 3% bandwidth, that’s signaling to everyone that there is going to be a lot of pent up demand, and that’s going to cause a lot of competition in all markets.

So just be mindful of that, if you do want to get into a market place now where there’s less competition, then that could be an opportunity for you.

So thanks everyone for listening and watching, until The Property Couch this Thursday, we’ll keep you updated moving forward. Thanks very much.

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