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Ben Kingsley Blog post by Ben Kingsley

RBA Rate decision – August 2013

As heavily anticipated at its board meeting today the RBA has reduced the cash rate by 0.25% to 2.5%.  Glenn Stephen’s comments earlier this month around having ‘reasonable scope’ to reduce rates follows on from his previous comments regarding the slower than anticipated move in economic activity away from the mining sector into the general economy.

I particularly like his comment around wishing he had a lever he could pull on to improve sentiment and obviously confidence within the economy which would lead to increase spending and activity and would eventually drive growth forward.  Essentially, a comment like this says to me that if confidence doesn’t shift he has no option other than to pull the only lever he has control of – the monetary lever (Cash rate).

The recent inflation data was welcome news for the RBA, as its low reading further supported the argument that the economy is not suffering from any real inflationary pressures.  Other data which also supported a lowering of the cash rate to even lower levels are the current lack of growth in finance lending from both business and households and the fact that new housing starts across the country remain flat at best in the recent data being reported.

The majority of economists who are currently reading the latest ‘tea leaves’ for our economy, as now building cases for even further rates cuts to come, and some more this side of Christmas.  Some even have their cash rate forecasts as low as 2%.

A cash rate as low as this is uncharted territory and my humble reading of the ‘tea leaves’ tells me mixed messages:

  • If we get this low, the Aussie dollar will stay below 90 US cents and maybe significantly lower (80 US cents maybe?).  Wonderful news for our miners manufactures exporters and inbound tourism.
  • Wonderful news for mortgage holders, as borrowed money has never been this cheap!
  • Not so great will be the cost of petrol.  It will get quite expensive for a period of time, especially if oil prices hold or increase on demand from improving US economic activity and fresh positive economic activity within the EU.  (Is $2 a litre possible? – I certainly hope not, but it could push this boundary if the oil stars align – ouch!).  Time to get the car converted to gas?
  • Also on the negative side of the coin is the impact on the prices of our imported goods, such as electrical goods, imported cars etc, and this might have a flow on effect on inflation as well.
  • Lastly – let’s not forget the overseas holiday’s impact.  Paying 10 – 15% more for your trip will hurt

Any punter holding money in savings accounts, returning potentially less than 2% will technically be considered ‘Dumb with Money’.

Property wise:  if this doesn’t sniff out the first home buyers, I don’t know what will, as more and more suburbs will start to demonstrate mortgage repayments being cheaper than renting a property.  This poses an interesting situation for property investors.  The downside will be vacancy rates will somewhat blow out, but this will be offset with good levels of capital growth in values as pent up demand pushes up prices. I’m always happy to see capital value increases seeing that rental demand will return when our population continues to grow over time.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)

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