RBA Cash Rate Decision – June 2018

Today Governor Lowe and the Reserve Board met and — no surprises here — cash rate is on hold at 1.5%. So, a bit of a “rinse and repeat” as I like to say. And that’s definitely going to be the case —  I’m calling it here now —it’s definitely going to be the case right through until the end of 2018, and I can’t see that changing anytime soon in 2019.

That’s because we are delicately poised in our sentiment story. So we do have quite a good confidence story around new business spending, infrastructure boom and also export results; but where we are being challenged now is where housing plays a fundamental role in the broader economy. By that I mean, let’s take a look at some of those points…

 

Firstly, we’ve definitely seen the top of the cycle in the last piece of house price growth. Why are we saying that? That’s because we’re seeing that reflected in the numbers. Property prices are going down, clearance rates are coming down; and that’s been manufactured by the intervention from APRA. But the story continues, doesn’t it?

We’re seeing what’s coming out of this Banking Royal Commission, where we may see even further tightening around credit policy.

Now, that’s challenging because there’s a lot of people out there — and there’s a lot of household debt out there — where they had gone and got borrowings, and now they’re going to struggle potentially to refinance those borrowings to other lenders because servicing calculators have reduced the amount of credit we’re able to access. That is starting to make the consumer and the household a little more nervous, and we’re seeing that in retail spending and in general consumer confidence. It’s absolutely critical that we get this sort of story onto ground level, so it’s a soft landing. It’s certainly not going to be a big market correction, but it’s not giving the Reserve Governor and the Board any chance to move rates higher because we know that this will impact sentiment incredibly, and will basically stop all consumer spending, which will mean economic growth will slow and, if not, go into recession. Obviously, this is going to be challenging.

If we couple that with also what’s going on around the globe: at the end of last year and early in the New Year we did see a basically-unified growth story happening right around the globe, which is now being challenged at the moment by a couple of things.

We’re seeing political instability in Italy and the European Union, so that’s making Europe a little more nervous; we’ve obviously got the US and North Korea story that’s playing out right now; but we’ve also potentially got some trade wars.

We’ve seen both the US and the Chinese Government quell those trade stories, but we’re still seeing the Trump administration push forward with tariffs around Mexico and Canada, and those types of things. So it is happening. But not at that “big end of town” — where it’s China versus the US of A. You can understand that both of those economies get it — both of those political instruments get that we need to see uniformity around united trade….

… because when we get that united trade, we get global growth. And when we get global growth, we get jobs and prosperity improving.

So that is the challenge!
When we circle back to Australia, and we also then have a look at the unemployment story, it’s an interesting one. We’ve got record population growth and record immigration, which is a good news story from a consumption point of view — bringing more people in as well as being a good news story longer term for the economy — but what it also means is that there’s more competition for jobs.

Obviously, this means that employers don’t have the pressure to increase wages because there’s no pent-up demand in that employment space where you’ve got a lot of competition. Ultimately, this means that we’re not going to see any sort of pressure on wage growth for the short term — and that means that, really, inflation will probably be benign. And when those types of things are benign, there’s absolutely no reason for the RBA to be pushing the cash rate higher. They need to see sustainable pressure and stronger growth than what we’re seeing today. And that’s why, throughout the remainder of 2018, I’m likely going to be telling you why the cash rate will remain on hold.

Thanks for watching.