RBA Cash Rate Decision – September 2018

Today, the Reserved Governor and the Board met and they kept the cash rate on hold at 1.5% for the first month of spring.

There’s obviously been a lot happening over the course of the last month.

We now have a new prime minister — ScoMo as we like to refer to him — so, Scott Morrison takes over from Malcolm Turnbull. Now, the economy, like in business, doesn’t like this sort of uncertainty and political turmoil — so it’s really important to see what happens with the data and the confidence. We know that Scott is going to set a lot of different policy changes to try and get the Liberal Party back into a winnable position at the next election… so that is the big news.

But what also caught my eye this month was actually a statement from Bill Evans, who’s the Chief Economist of Westpac Banking Corporation.

Bill is a very, very astute predictor of the cash rate and someone who I look to, in terms of his opinions. He talked about the cash rate remaining on hold until 2021.

Why would he be saying something like that?

Well, I suspect it has a lot to do with a couple of important things. Firstly, why would the RBA increase the cash rate if they actually didn’t have the impetus to do so?

Because the banks have been doing it! That’s the other bit of big news.

Last week we saw Westpac raise their variable cash rate by 14 basis points. And then we saw Sun Corp and Adelaide Bank follow in that direction. They increased by 17 basis point, and up to 40 basis points for interest-only lending. If you do have an interest-only loan now when we are seeing this type of differential, it’s time to talk to one of our mortgage brokers and have a chat about whether it’s still appropriate for you to have the interest-only loan versus a variable loan. Because, if the banks continue to do the heavy lifting for the RBA, there’s going to be a challenge here — there’s going to be a challenge around consumer consumption.

Because it is starting to slow — housing cycle is also starting to slow. We’re going to see some headwinds for the RBA, in terms of the economy. Because we still have low inflation, we have low job wage growth; so these types of things are still challenging.

What we do need to see are these things — we need to see the Australian dollar ($) stay low, and it’s doing pretty well. We also need to see unemployment continue to push lower — more jobs, more capacity inside and more pressure on wages so we see wages growth. Once we see inflation and wages growth, then the RBA may be confident enough to actually lift the cash rate. But, while the banks continue to do what they’re doing because of their claim of cost of funding — in fact they would have done this six months ago if it wasn’t for the Royal Commission — they are passing it on. So expect all the lenders to follow.

We talked about this earlier, we gave you plenty of warning that this was going to happen. So, let’s see what happens now to consumer confidence and consumer spending. Again, if that slows; the economy slows, and that will keep the cash rate on hold for a very long time, and may — I’m not calling it — but may see the cash rate drop. So interesting times ahead!

Thanks for watching.