RBA Cash Rate Decision – October 2018

On this first Tuesday in October, the RBA Board met and, really, the challenge was, “What could they do?” They did very little — probably sipped a bit of tea because there’s nothing more for them to do with the cash rate. And this may be the case for several years to come.

Now, why is that? Especially considering that the GDP numbers in June were actually really positive —they were above trend — and we saw that the recent unemployment numbers were also quite positive, in terms of lower unemployment.

With the unemployment story, there is still spare capacity there. There’s still underemployment, and that’s meaning that there’s no strong wage growth that’s going to flow through to inflationary pressures, which is going to put pressure on the RBA to move the cash rate.

 

What we’re seeing here, in terms of this strong and economic growth, has probably come through this construction boom and the infrastructure boom that’s also occurring. But now, with property prices cooling — Credit Royal Commission — consumer confidence is really, really low.

So we still might see some good GDP numbers, but they’re on the back of exports; they’re on the back of Government infrastructure spending; and they’re on the back of business investment. Now, if that’s happening, but also consumers are starting to get a little bit weary and the construction boom starts to slow down, then we may have hit the peak of our economic growth cycle.

Also with the Labour Government potentially coming into power next year— who are a little bit anti-business and certainly higher taxes — we’re going to see less business confidence. So if you combine business confidence drops with consumer confidence drops, you’re potentially going to see a very, very slowing economy.

If you add to that what’s happening globally — we’ve got the trade wars; these tariffs that are going on between the US and China. This is having a drag effect on the confidence around the globe, in terms of global economic growth. That being said, the U.S. is firing GDP numbers greater than 4% employment — basically, full employment around that 4% mark. So the U.S. is going really strong, and this meant that the Fed Reserve, and Jerome Powell who heads up that, is still continuing to raise rates off their historical lows.

 So that’s a good sign for the U.S. … but what does it mean?

 

In terms of the cost of money going up, there’s going to be a flood of money coming in offshore into the U.S. That’s going to put pressure on the US dollar. For that dollar to go up, the Australian dollar still stays low. So that’s good for export — not necessarily great for us if we want to go on overseas holidays. It could also mean that some of our imports are going to cost us a little bit more. What’s interesting about this story is, this trade war and what’s happening globally could also contract our exports. And that puts further pressure on the economy.

So, is this as good as it gets in this part of the cycle for the Australian economy?

It could be. This means that, effectively, the RBA has nowhere to move in terms of raising the cash rate. So that’s why it could be lower for longer and is a real challenge for the economy.

That said, in a household sense, out of cycle rate rises … if that cost of money is going to go up offshore, that’s going to flow in to the Australian consumer. So it doesn’t matter what the RBA cash rate is — if the banks are going to have costs of funds going up, they’re going to pass it on.

Continually expect a little bit more over the course of the next 12 months, in terms of possible out of cycle rate rises. Nothing too dramatic, but certainly start to fact them into the family budget because that’s going to be important for you.

Also, as I would think you would say, house prices, after their historical peaks, are going to slow down.

So we’re going to see some outperforming markets have some growth in some pockets, but broadly speaking, Sydney — having had an incredible run — is going to continue to come off. I suspect that this correction will be around the 10 – 12% over the metropolitan area. We’ll likely see Melbourne probably coming off to around that 8 – 10% mark. Brisbane is definitely a terrific market at the moment — we’re seeing growth in that middle ring area, where there’s still real affordability. Adelaide is another good story. Hobart is being a good story. Canberra is a good story. Perth is still struggling, in terms of getting that momentum and getting that underlying demand coming into the market.

So, there’s still some great opportunities inside the market when everyone else is fearful.

In terms of looking after your own family budget, start to think about this. Start to think about your discretionary spending. That — as I keep saying — what flows into the broader economy. When our consumer spending is down, consumer confidence is down; the RBA have nowhere to move. They definitely don’t want to lower the rate any further; but if we do see — and let’s think about the next 18 – 24 months — if we do see the cost of money going higher, but families are still struggling, the RBA may — and  it’s a very, very low call in terms of a marginal call — but they may have to actually drop the cash rate lower.

But, at this stage: cash rate on hold. I can’t see that changing for several years — probably we’re talking 2021. So I’m in Bill Evans’ camp in terms of where the cash rates going to sit. So if cash rates are low, there’s definitely an opportunity to make your money work harder for you — whether that’s paying down your debt, or also looking at ways in which you can make your money work harder and getting a cash on cash return and investing sensibly.

Thanks for watching.