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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate Decision – May 2019

At the May board meeting, Governor Lowe and the Reserve Board — well, I would have loved to have been a fly on the wall here because I’m sure this would have been a serious consideration—  but they kept the cash rate on hold.

That’s right. For the 34th consecutive month, the cash rate is going to remain on hold.

Now, does that mean that we’re going to see the cash rate staying at this level? I predict not.

I suspect the only reason why they didn’t move on the cash rate was probably something to do with the federal election that’s going to take place in the next week or so.

It’s important to understand that the economy is still not in good shape. The reason for this, which we saw, came out in the inflation data.

 

In the first quarter of this year, we saw zero inflation. Now, most commentators and forecasters predicting around 0.3/0.4% for the quarter, taking the annualised rate of inflation between 1.6/1.8. But what we did see was zero inflation, which meant that the annualised rate of inflation is currently sitting at 1.3%. This is well outside the bandwidth of 2 – 3%, which is what the RBA has been saying they want to get to over a gradual period of time. But if it’s going in reverse, that is not a good sign.

We looked at the unemployment story for March — we saw a flat story around unemployment. That would have been another reason why they’ve probably held off, and also the pending tax cuts that are also going to be coming through, which will take effect from 1 July; putting more money in people’s pockets.

The reality is though: the economy is deteriorating quicker than most people have expected.

And there is a fair reason for that.

The fair reason is in relation to what’s happening politically. The uncertainty is not good, in regards to business investments. Businesses are sitting back, looking at both parties, and saying they’re not happy around the Liberal Party, in terms of their chaos and disorganisation, but they do run a good economy, versus the Labor Party with the uncertainty of all of these new tax charges that are going to flow through and take money out of the economy. So it’s important to understand that, in regards to why businesses are sitting back, going “This is no good”, this is seeing the economy slow down quicker than we’d all hope to do.

 

Some of the other data that we want to talk about, in terms of globally — we have some interesting stories there.

Firstly, the US, some good GDP numbers. We saw GDP currently growing annually at 3.2%. The other big news out of the US was the Fed Reserve’s Jerome Powell — and he may have been looking at the GDP numbers as well as the employment story in the US, which is still pretty strong — when he spoke around what his intentions were with their with the US interest rates. The story is this: he doesn’t see a need for a rate cut. The markets were expecting him to say that there will be a cut, and that’s obviously led to the stock market performing pretty softly over the last few days after hitting their record highs again. But he’s also saying that he thinks that inflation will improve and the economy is in an okay/good position — not as bad as some people were hoping, in terms of reducing the cash rate over there.

 

Back home, in terms of our credit story.

It’s not a good one, in regards to housing credits. So we did see 0.2% growth in March and that has meant that the annual rate of growth in credit for housing is sitting at 4%. If you think about population growth and all these people coming in, this is how bad that number looks.

It hasn’t been this low since the data was first created back in 1976. That’s 42 years ago.

So that is obviously a story in itself and it would be playing in the back of the minds of the RBA as well; in terms of trying to stimulate the economy.

What has forced the economy to slow, which we’ve obviously seen, has predominantly been dwelling prices; the house price correction that we’re seeing nationally. We did see 0.5% fall for capital cities annually, which has moved to 8.4%. This is the highest fall that we’ve seen — even bigger than the GFC period — since the data set began in 1980. It has been led by Sydney, which is now down 14.5% and Melbourne, down 10.9%.

[Recommended: CoreLogic’s Dwelling Value April 2019]

 

What led to this correction in property prices has predominantly been the interference in the market place by APRA.

Now, I commented and praised them for the interference, which essentially quelled the amount of investors that were currently in the market place because it was unsustainable. But that job was done almost 9/10 months ago when the market started to flatten out. The job’s done.

So, Wayne — who heads up APRA — if you’re listening… please listen to me and drop the assessment rate.

It’s crazy having an assessment rate at 7.25% — it should be down around 6.5; 6.75 at worst. In this way, from a borrowing power point of view, borrowers would be able to borrow up to 5% more, which means that, potentially, they’ll be interested in buying into a marketplace. This will stabilise the property market because, at the end of the day, this has been a manufactured correction by you (Wayne) and by APRA — so please make sure that you listen to that story. We’re now starting to hear calls from CEOs of banks, in regards to this same message that I’ve been rabbiting on about for nine months or so now.

 

That is an important story. And the other story is…

How many rate cuts we are going to see?

It really comes down to politics. We talked about this before, in regards to what businesses hate — businesses hate uncertainty. They want direction. They want certainty. They want policies that are about growth and aren’t about slowing the economy. This is the challenge we have.

In my personal view — and I’m on record many times talking about this —  if we do see a Labor government, I suspect we’re going to see a deteriorating economy. I suspect we’re going to see even further rate cuts.

I think if the Liberal National Party get in — and that will be a surprise — I think business confidence will rebound quickly because it is a little bit of “business as usual”. Whereas the uncertainty around the policies Labor is proposing, especially if we focus in on negative gearing and capital gains tax — just really shocking policies. They do nothing for growth. They do nothing for jobs. They do nothing for the economy overall. All they do is put pressure on house prices and over the medium term, they’ll put pressure on rents increasing. So not a good policy position to be in. Hopefully cooler heads will prevail if Labor is victorious on the 18th of May.

So, lots of detailed news. Make sure you tune in next month when we know what’s going to be happening.

But there are changes afoot, and it’s going to happen sooner rather than later when it comes to the cash rate.

Thanks for watching.

 

 

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