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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – April 2016

As widely anticipated the reserve governor and the board met and they’ve kept interest rates on hold for another month.

Now what are we looking at around interest rates and monetary and fiscal policy? Well there’s a lot of things that we’re looking at. Firstly, we’re coming into an election period and what that means is the reserve bank may actually keep interest rates on hold until we see what happens around the election. Now we’ve seen the prime minister and the treasurer move the budget announcement forward to early May. What that means is potentially we could have a double disillusion election, which means we could see an election on the 2nd of July. When you are in an election mode, does the RBA actually looks to change rates? Well, usually they wouldn’t unless they feel that the economy absolutely needs that stimulus. Even though they are independent and let’s face it, they look after monetary policy but the federal government look after fiscal policy, but it’s those two policy arrangements that keep the economy moving. So even though we may not see a rate cut at all until the middle of the year, and you know from watching my previous videos I didn’t think we would see a rate cut this side of 2016, well now I’m saying I think we will and here’s the reason why.

Over the last 6 weeks or so, we’ve actually seen wholesale funding start to increase. Which has meant the cost of money that the banks then on lend to us is becoming higher for them. So there’s a bit of margin squeeze for them. Well let’s face it, the banks are in the business of making profit so they’re going to pass that on to consumers. So I do expect to see an out of cycle rate rise, unfortunately yes, our mortgages are going to go up inside probably the next 3 to 4 weeks. Now if that does happen, it does give the reserve bank a little capacity to reduce rates so they may drop rates by the middle of the year down to 1.75%. Never been seen before levels for our cash rate so that’s an important one.

Now what would be the trigger for such a movement?

Well we know obviously the cost of funding might be going up, that’s one reason. The second reason is, right now the Australian dollar is growing too quickly. Now we like the Australian dollar to be lower so our exports look more attractive and with those exports we can then obviously encourage our GDP – our gross domestic production. So with the dollar sitting higher at around that sort of 75-76 cents, that’s simply too high. We would prefer to see to a 6 in front of that – maybe 68 -69 cents. So that’s an important reason why they do that.

More broadly speaking around the economy, they also want to see that the internal economy is moving. We’re talking about more constructions, more jobs being created, more positive sentiments about business and we’re starting to see that soften off a bit. So yes, we want to get the dollar down, we want to see that domestic productivity and that economic growth occurring and if we don’t get that, that’s a real trigger for the RBA to reduce rates down by 25 basis points around the middle of the year. Now again, for us borrowers it doesn’t mean much if we’ve actually seen rates rise by as much as 50 basis points in these out-of-cycle rate movements. Hey, but it’s better than nothing and let’s hope that when it does happen that they do pass it on to us.

Thanks for watching.

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