RBA Cash Rate Decision – November 2018

On this Melbourne Cup Tuesday, Reserve Governor Lowe and the board met and they’ve kept the cash rate on hold for another month.

Really, what we’re seeing here is no new stories — inflation is just non-existent. The September CPI data came in at 0.4% increase, which took the annual rate to 2%. Now, the market was expecting a 0.5% increase so we didn’t even get that. So, really, inflation is not even in the conversation.

What we did see in October though, was very, very choppy equity markets around the world — some markets giving up to 15% of their value away in one month. So the scariness and the the October jitters as we like to call them, certainly surfaced. In fact the ASX dropped just over 6% of its value for the top 200 ASX stocks. So that’s problematic. We saw that correction, and that’s putting that those jitters and that risk-sentiment out in the marketplace as well.

If let’s add to that the house price concerns going on around Australia. We saw the CoreLogic numbers come out — we’re seeing annualised declines at the fastest level since 2009. Sydney is down around 7.4%, Melbourne down around 4.7%, Brisbane’s up, Perth continues to be down, Darwin’s down Canberra and Hobart are looking pretty good, and Adelaide; up 1.8% on annualised basis as well.

So there’s still buying opportunities in that particular market; but you’ve got to be very, very careful in terms of where you’re buying. So stick to the fundamentals and focus in on where you’ll get that good return over time.

Now, I want to talk about unemployment — or employment in general. This is our big challenge right now. What we’re also seeing in the numbers is the construction-led recovery that we’ve had. We do know now that it’s very clear that the trend for dwelling approvals and construction is starting to slow. So the broader economy is going really well — driven by infrastructure spending, driven by exports, and driven by business investment. But with the choppy equity markets, we’re starting to see, in terms of household prices going down, the wealth effect starting to take shape.

So we’re going to see consumer confidence and consumer spending problematic.

I said I wanted to talk about employment — well that’s where a lot of people are employed. So if  we do see less retail spending, less retail activity in the general economy — it’s fine that our exports are booming, it’s fine that we’re seeing business investment (that’s a good sign);  but will that now start to slow down? Certainly our exports are doing very, very well with our low Australian dollar. But this is where my concern lives, in terms of employment. We do see the unemployment rate around 5% — that’s a good number, but the reality is we’ve still got a lot of people who are underemployed. We’re still seeing challenges around wages growth.

The story is going to be this… if unemployment creeps up, I expect the cash rate may just come down.

There is absolutely no appetite for the RBA to be moving the cash rate anytime soon. We’ve talked about this before: we’re going to go into 2021 with an unlikely move up, in my view. There are more arguments around the cash rate actually dropping a little bit, given that the banks have done these out of cycle rate rise movements. Because if we don’t get that momentum in the economy, they’ll will pull the lever in the negative direction — which is a good news for households if it happens. But if the economy is moving well and everyone’s getting job growth and also wages growth, then that’s also a good sign that you can sustain your mortgage repayments if rates do go higher.

 

So right now: no change, no reason to move in either direction, and that’s a wrap.
I hope you pick a winner in the race today — The race that stops a nation, The Melbourne Cup!
Good luck with your tip.