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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – April 2018

Today, Governor Lowe and the Reserve Board met for April and they kept the ash rate on hold at 1.5%.

No surprises there as both the Reserve Governor and the Board are flagging to industry and business that they’re in no rush to move the rates higher anytime soon.

 

The reason for that is they still want to see stronger economic growth; they want to see more pressure on wages. So we did see the unemployment rate for February at around 5.6% — so slightly higher than the previous recording, which was 5.5%.

We created 17,500 jobs in the month — and what’s important to understand here is why did that. Why did that margin go up by 0.1? The reason is the participation rate, so what we have seen is more people looking to be employed. We’re seeing this in women aged 25 to 44 and also older men. Now, what’s that an indication of? Obviously, we’re starting to bring that capacity up, and the Reserve Board and the Governor are pretty happy about it because that’s basically lifting the participation rate, which means more and more people are actively looking for work. So, there’s a bit of confidence out there around that. What we hope this will do is flow on to a lot more jobs created, lower unemployment rate and then, ultimately, some pressure on wages, which is what we need.

 

Over in the US in the month, we saw the new Federal Reserve changing hands from Janet Yellen over to Jerome H Powell — so in his first meeting they basically increased — as widely expected — their cash rate and they move their rate to 1.75. It’s the sixth rate rise since they’re ridiculously low levels pre-GFC period. We also heard him flag that there’s going to be two more rate increases in the US. That’s good for them — it’s showing that their economy is moving. Their challenge is about getting the balance right between going too quickly or too slowly. If you go too quickly, you slow down the economic growth story, and if you go too slowly, you’re potentially too late and inflation starts to cause real problems in the economy. So, from their point of view, they’re going manage that out; but they’re flagging to the market for further rate increases throughout 2018.

 

Turning our attention back to Australia:

In the last month, we’ve seen a lot of media reports and hysteria about the risk of interest-only lending and converting interest-only lending over to principal-and-interest.

We are going to see some household stress. So, what was interesting is, in the minutes of last month’s meeting from the RBA, we saw that they had a discussion around it. I wanted to share with you what was in the minutes. It’s a little dry so you’ve got to stick with me on this! But, once we get through it, I want to talk to this particular area of commentary inside the minutes. So, this is what it said:

“In relation to interest-only lending members noted that most interest-only loans had terms of five years or less, after which borrowers could apply to extend the interest-only period or convert the loans with principal-and-interest repayments.”

 

So the reality is they are saying you can still switch back to interest-only again if the lender can see that you’re be able to do that, you could refinance, or you can switch to principal-and-interest repayments, which obviously means you’re going to be paying more than just the interest-only piece. Members went one to talk about,

“Members noted that the profile and magnitude of scheduled expiries of interest-only loan periods over the coming few years was comparable to that of recent years.”

So what they were talking about there is, is there going to be a real spike in this area?

They continue on:

“Members discussed the effect on disposable income and spending for households converting to principal-and-interest payments, noting that the increase in payments would be significant for some individual households.”

So that is flagging that there will be some households that will experience some cash flow hardship.

And what is going to happen there?

At the aggregate level, however, the likely increase in loan-related payments would amount to a small proportion of household disposable income and the effect on household consumption growth would be smaller still.

So, what they’re saying— using the data that they have, a taking the hype out of it and looking at the facts — is they don’t believe it’s going to be a significant problem.

So we’re seeing certain commentators in the market saying they think it could be a significant problem. But the RBA has looked at the data and they’ve said that, yes, there may be some households where disposable income could be affected — because the flow-on effect of that is, if we’re going to be spending more by making our mortgage repayments and looking after our household debt, it means less spending in retail, less consumer activity, lower GDP numbers … but the fact of the matter is they’re not seeing that spike, and it’s consistent with the long term growth of credit.

So, they’re not seeing it as being a bigger problem; but what’s being reported in the media — I think this is an important point — so I want to leave with that today … Look at the cash rate.

Cash rate is lower for longer. Put your spare cash in your offset continue to build up the buffer. If you’re in a position to invest — I’ve always said the best time to invest is when you can afford to invest, both today and for the longer term — so to those people who have lazy money: it might be an opportune time for you to get into the market. For those people who do have all of their money exposed; if you are in interest-only territory, start building up that buffer, keep putting that money into your offset account, and you’ll be well served to take advantages of opportunities in the market over the coming years.

Thanks for watching.

 

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