RBA Cash Rate Decision – December 2018

On this first Tuesday of December the Reserve Governor and the Board met as we enter the festive season, and they kept the cash rate on hold at 1.5%.

I will come back to what’s happening in the domestic economy, but first of all I want to talk more broadly about what’s happening in the global economy.

Most namely the biggest story of the last six weeks, and certainly into November, has been the stock market corrections that we’ve seen around the globe on the fears of a slowing global economy. You can also factor in the spike that the US economy had and the US share market had through the lower tax rates introduced by Donald Trump. So we’ve got that as a backdrop, but also the share market has also lost confidence because of the trade wars that are going on.

Interestingly, over the weekend China and the US met and they’ve put a truce in place — well, it’s short term so it might be a false dawn, but we have a truce in place — which means the US aren’t going to increase their tariff percentages and China has promised to buy a significant amount of US goods.

What has that meant? Well, we’ve definitely seen the stock market have a very, very good couple of days and that’s potentially put some confidence back into the broader stock market, and hopefully the broader economies around the world. But it is short term; we need to get through this Christmas period, which is going to see some significant changes.

In addition to that, what’s also potentially put some confidence back into the market is some of the commentary from Jerome Powell, who is the Federal Reserve.

Now, let’s face it: the Fed Reserve pretty much controls monetary policy around the globe… so when he talks, everybody listens. There was some change in his language from previous meetings, where before he was suggesting that we were some way off the neutral rate position, but now some of that commentary is changing, suggesting that we’re closer to this neutral position. So this has also put some confidence back into the market as well. That’s why we’ve seen the last few days as being very, very good days on the markets.

 

Let’s get back into the Australian economy… why is the cash rate remaining on hold?

Well, it’s still due to the two fundamental reasons. The first one — no wages growth. We haven’t seen any wages growth and inflation is really low. So I’m a bit of a broken record on those two points, and I’ll report back to you when there’s going to be some changes in this particular area.

My big question is really around, “What’s going to happen over the consumer spending period of Christmas?”

We have nervous consumers and that’s been reinforced by credit growth, especially housing credit growth. We’ve only seen 0.3 of 1% growth in October, which means that our annual rate of credit for housing is the worst it’s been in five years. So we do know that this housing correction, this housing slowdown, is going to have a significant impact to the broader economy.
We have some positive news in the economy around low unemployment, but I think this is going to be a drag on the economy so I’m not as optimistic as summer. Yes, we’ve got the infrastructure spending, but if the global economy slows down and our raw material costs — such as iron, ore and all of the other materials — that we sell globally start to reduce in value — that’s obviously tax receipts.

 

The other big factor that we need to start thinking about right now is the federal election.

We do know that last month Scott Morrison, our prime minister, announced that he’s going to move the budget to early April, which signals that we’re in for an election. There’s some positive news about this, in regards to potentially getting closer to a surplus; but with a change of government more likely than not – potentially to a government that may not necessarily be as pro-business as what we see the Liberal Government of the day are — we’re going to potentially see some confidence. So, we’ve seen some green shoots in regards to business confidence and some CAPEX (Capital Expenditure) spending plan for next year. But during an election period everything slows down — everyone needs to how bad it’s going to be, and that’s going to impact the broader economy in GDP. So, it’s whether we recover from that position, especially given some of Labor’s policies are quite restrictive. We also know about the negative gearing and capital gains exemption policies as well so, until we see what comes of these, I think there is going to be an overall confidence punched to the economy. This is worrying for me in terms of where this confidence will sit. Hopefully smarter heads will prevail.

We’re already seeing the Reserve Governor talking about being very aware of the credit crunch going on at the moment (See my podcast episode, Nine Ways to Navigate Credit Crunch), and he will hopefully influence the politicians around making sure that we remain robust in allowing people to access credit. By doing this, the economy should be able to get through this lumpy period and hopefully move into the forecasts that the RBA have suggested, which are improved forecasts for our GDP and the overall economy over the course of the next couple of years.

 

Well, there we have it, that’s it for this year! There is no rate announcement in January — the next rate announcement will be in February. So, let’s watch Christmas closely and see the sales numbers coming through. Let’s hope everyone doesn’t buy on personal credit because that’s the other problem we have is household indebtedness — have you taken this critical step to reduce your debt? We want to make sure that people are using actual cash and not splashing too much on their credit card. Be sensible over the Christmas period, I look forward to seeing you at the next RBA update in February.

Thanks for watching!