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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – August 2015

Today the Governor and the Reserve Board met and kept interest rates on hold for another month. Now, they are continuing to stay at record low levels where the cash rate remains at 2%. Now for a first in this commentary series that you may have seen or may not have seen before, I’m going to actually cut to some audio of Glenn Stevens presenting at the Anika Foundation Luncheon. Now its an important luncheon because it’s all the economist around Australia who come along and listen to what the governor has to say about the economy. So there is two sections that I want us to listen to and then I’m going to make some comments around each of those sections for this video. So let’s listen to Glenn Stevens right now.

We’ve seen a period of somewhat disappointing though hardly disastrous economic growth and we’ve had inflation well contained that has seen interest rates fall to very low levels. The lowest level in my lifetime and in most of us here. As I’ve said before, the question of whether they might be fall further has to remain on the table, at this point.

But in answering that question, it is not quite good enough, really, just to say that if we’ve got continuing evidence of softness then necessarily interest rate should fall further without considering the longer-term risks that that may bring.

So what does Glenn Stevens talking about when he is referring to the risk associated with low interest rates.

Well, its very clear that he and the board are very concern about asset price risk. Are asset values getting beyond their fair and median price point. If they are, what can they do about this? And this is where APRA (Australian Prudential Regulation Authority) is stepping in. And what APRA are doing is behind the scenes, they are approaching each of the lenders and they are giving them an ultimatum. Either we come in with a big hard stick and hit you or you go and stop people borrowing money for investment purposes. So what we are going to see is letters coming out to all of us, mortgage holders and we are going to see interest rates increases next month around investment lending. In fact, with some lenders, we are actually going to see anyone who is holding an interest only loan to be slugged a higher interest rate and slug is the right word.

I am disappointed with the approach of APRA in regards to what they are doing around trying to curb investment lending because some lenders don’t have the capability inside their system to determine whether they are investment lending or if it’s owner occupied lending.

Now those lenders are actually just saying that if you’ve got an interest only loan, you are going to pay a higher interest rate. And that’s unacceptable to me for existing lenders because if I’ve brought a property some 3 – 5 years ago as an investment property, I’m now being told that I’m going to pay a premium on interest because I’m a property investor. I think that’s poor form. What I would have like to have seen were some further commentaries in the marketplace about the risk of investing in properties and the fact of the matter is if you are investing in properties in some market at the moment, you can expect to have very little growth or potentially a correction in the value of your property in the next couple of years if you’ve bought poorly. So that’s the risk element. With APRA doing this, it’s going to allow the Reserve Governor and the Board to potentially move on interest rates to a lower level if they feel they need to.

Now the other part that is giving them the confidence to do that is the inflation rate. The inflation data came out a couple of weeks back also with underlying inflation around 2.3%. That’s at the lower range. Now being at the lower range means the governor is not concerned about inflationary pressure at any point. Now I want to get to the second part of his speech. You can actually watch the full version of his speech and we will give you a link on this site. For the second part of this speech, I want to highlight where he starts to just discuss about the concept of the Australian economy moving at trend growth. Now trend growth is around 3.25%. Why is trend growth in terms of GDP Growth so important? Well, it is a common belief that when we’ve got trend growth, we’ve got full employment which means anyone who wants to work, has the capacity and will work. So that’s an important measure.

But what’s being interesting about the Australian economy which is still been growing reasonably healthy at 2.5% is that the expectation around unemployment growing actually hasn’t happen. Because it hasn’t happen the Reserve Governor and the Board are now saying is this the new norm? Now they are not saying that completely but they are starting to open the conversations up. Remember, he’s talking to a group of economists around understanding what their thoughts are so that they can have a collaboration approach to whether this is being the case. So it’s an interesting point. If now, the Australian economy is going to grow at 2.5%, what does that mean for the broader economy? What does that mean for tax revenue? What does that mean for interest rate? So there is a delicate position here in terms of whether interest rate is going to go down and the Australian Dollar is going to play big part of it. If they Australian Dollar continues to drop and if we see a six even if it’s in the late sixes like 68 – 69 cents, then in reality maybe the Governor is saying that’s low enough. We don’t need to drop interest rates any further. So let’s take a listen to this second part of his speech.

Firstly, the economy is making the adjustments we needed to make, a bit more slowly than we would prefer but it is making them.

Secondly, if the slow growth of wages has in fact been a net saver of jobs with the reconciliation of the labour force and output data are partly because of slower wages, well, that would appear to indicate a degree of labour market flexibility in operation.

Thirdly, to the extent that the data are hinting that our assumptions about trend growth may need to be revisited and I’m not saying that that is the right conclusion but if it turns out that way, that is going to worth some discussion. It need not be the case that per capita growth would be any lower, if the reason for overall lower growth is simply lower population growth. So there may be no particular implications for living standards as measured by income per head. But if there were assumptions about absolute growth rates embedded in say, business strategies or fiscal strategies, or retirement income plans, then they would need to be re-examined.”

So it’s interesting time ahead for the Australian economy. Glenn Stevens, I think, is very good in sort of keeping his options open and so he should. We still can’t forget that we’ve been under this amazing journey of almost 25 years of positive economic growth with no recessions since the early 90s. It’s an amazing result but there might be some headwinds that are going to see us potentially slow as an economy which is going to make some big touch decisions federal and state government around what they do to help us get through this period. So it’s interesting times ahead and that’s why I want to make sure that you could understand from the horse’s mouth in regards to Glenn Stevens’s commentary around this. So stay tuned for further updates because it is going to be really important to see where we are going with this. One thing is for sure is that we will probably see low interest rates like we are seeing now, these historically low interest rates, for a longer period of time until we actually see the global economy pick up and then we see the Australians part of that global economy. So you would probably think lower interest rates for longer. Will they go lower in terms of another 25 basis points? Well, APRA has done some work to allow the Governor and the Board to make that decision by trying to hopefully contain the asset price bubble that may have occurred in the property market. So it’s going to be interesting times ahead.

Thanks for watching.


(Those people watching/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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