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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate Decision – March 2019

On the first Tuesday of March the Reserve Governor and the board met, and they kept the cash rate on hold once again.

But certainly what a difference a month makes when it comes to what’s likely going to happen in the economy moving forward and what’s going to happen to the cash rate! In a minute, I want to talk more about what Bill Evans said in his predictions for TWO cash rate reductions over the course of 2019. But first we need to understand what’s going on…

The Reserve Governor and the board need to make sure they bring some type of stability in terms of how they control monetary policy — and what they do is they can’t move from a signaling of a tightening bias straight away to a signaling of a reduction bias, or a bias towards lower rates.

The RBA need to move slowly to that bias.

And we saw that again in regards to the Reserve board minutes and in the monetary statement they released later in the month, signaling their intentions to go to that neutral bias. Now that also meant the GDP — Gross Domestic Productivity — is going to be changed. They were forecasting in 2019, growth of around 3.25% — that has been adjusted down to only 3% and we’ve also seen some adjustments in the 2020 year. Through signaling from that tightening bias to the neutral bias to that easing bias, has meant that we are going to be in a position where the cash rate is going to be challenged.

If any of you listen to our podcast, The Property Couch, you would have heard in Episode 221 Dr Andrew Wilson talk about his belief that the cash rate may drop as early as April.

We saw Bill Evans, the Chief Economist of Westpac, talk about a potential rate cut in August, and then another one in November. Now what’s his reasoning behind that?

I went and had a read of the statement they released last month — and it was quite interesting reading. They were talking about the broader economic momentum in the economy, and this broader economic momentum in the economy slowing down. They moved form a 2.6% growth forecast in 2019 down to a 2.2% forecast for growth in 2019 and also 2020. So when they pushed that through their models, that also meant it wasn’t sustainable for the long term growth we try to achieve, which is between 3 – 4%, and also to try and get inflation in between that 2 – 3% range. We haven’t been able to do that yet with low inflation.

We did see some good numbers come out in February in regards to unemployment – so we saw the unemployment rate stay steady at 5%, we saw a greater participation. But to surprise, we also saw  39,000 new fulltime jobs get created — so that was a positive. We think unemployment in the near term is actually looking reasonable. We also saw the Consumer Sentiment Index move back to a bias of a positive outcome as opposed to a negative bias that we saw at the end of last year and in January’s numbers. So there is a slight movement — it is only slightly-marginally more optimistic than pessimistic, but it is a movement.

So we then had to understand what Bill Evans and his team of economists there at Westpac were trying to do — and what they were talking about inside the housing market were three main things…

The first one was certainly a slowdown in construction. And that slowdown in construction is certainly going to flow down into GDP and the amount of money moving around in the economy. They also started to look around at the unemployment story. And they also started looking at the amount of credit that was being lent to both owner-occupiers and investors. And with that they saw a double-digit decline in loan approvals. This also meant that their models saw further price falls this year in 2019. So if you put all of these numbers together, and they’ve come up with a bias that there will be a need to ease the cash rate once, possibly twice.

What could be a catalyst for a cash rate drop NOT to occur and for us to stay in a neutral bias?

There’s still no evidence at all that we would see a tightening bias in the current  situation, especially with what’s happening globally  — trade between the US and China and the mess in the UK with their Brexit strategy.  I think the Reserve Board won’t need to move rates if a couple of things happen…

If APRA was to look at their policy settings around the assessment rates that they used for borrowers, and if they were to ease that off the 7.25% rate that they currently have the banks locked into — and reduced that to say 50 basis points that will allow borrowers back into the market. So we are talking not only about owner-occupier borrowers but also about investor borrowers. That will stimulate a little more growth but, of course, we don’t want to overdo it — so if it’s got to be cautious. If they do that, the Reserve Board may not need to do anything as we may see the property market start to stabalise more quickly than a lot of people anticipate. So most forecasts are saying that the property market will continue to decline in 2019 and maybe into 2020.

Auction Clearance Rates for February were surprisingly better than what they were at the end of last year.

They were terrible at the end of the year — basically, buyers had abandoned the market place. But we are starting to see Auction Clearance Rates for Melbourne and Sydney in some areas as high as 60%, 65%, 70 %. But overall across the broader areas of Melbourne and Sydney markets, around that 55%- 60%. So if we see those Auction Clearance Rates around that type of level, I suspect we won’t see to many price falls further, and we’ve probably come out to the bottom.

If we do see some shocks to the system, such as a change in Government and confidence in the business sector start to diminish, and these leading to the unemployment rate going further — as that is what Bill Evans and his team believe; that the unemployment rate could move back to as high as 5.5% — really leaving the RBA no choice but to provide more stimulus into the economy by dropping the cash rate.

Again, it’s an interesting time.

I can’t see a cash rate reduction before the election.

If one does occur, it means the economy and the signallying in terms of all the mechanisms that we’re measuring such as employment, GDP, inflation, wage growth occurring… that’s not going to happen.

Coming up to the political election, both parties are going to be offering tax cuts. Those tax cuts could also be enough of a stimulus to get people out spending more. So very much a consumer story, very much a wealth effect story that we’ve been talking about of the last few months. So it is interesting times!

I think you can certainly say with confidence that there will be no more movements in your mortgage rates over the course of the next 12 months.

But if we do see the cash rate change, hopefully we’ll see the lenders pass that onto you, so you should get a little bit more in your back pocket.

Thanks for watching. I’ll see you next month.

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