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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – August 2016

As I anticipated last month, the Reserve Bank has moved on the cash rate by dropping the cash rate lower. We are now in a stage where we are effectively in an uncharted territory with the cash rate as low as what we’ve got. It’s an interesting time. So on balance, what they’ve looked at is the inflation data. Now, usually what they like to see is inflation running between 2% – 3% which means that the economy is growing and the capacity in terms of the way a capitalist economy moves. They would like to see that sort of inflation underpinning that growth story. However, we saw the last inflation data for the June quarter running in an annualised figure of 1% with the quarterly number of 0.4%. It wasn’t a deflationary number that we had earlier this year and that’s basically giving us some ability to move forward.

So cash rate is now being lower. What does that mean? What it means is hopefully the Australian dollar is going to pull back a little bit more, great for exports and again, this is all about job creation. The by product or the negative product is this potential for asset appreciation that’s going to be too high as we make money cheaper. The other big consideration we need to look at is are the banks going to pass on the full cut? If they are to pass that on, then that is going to be good news for borrowers right across the board. Some might say that there might be some argument to only pass on a portion of that but it’s a very competitive mortgage market out there at the moment. In fact, what we did see in the lead up to this decision is several lenders are actually dropping rate before to try and get in early and attract a bit more business as they see the overall lending market slowing down. We still need more lending from business so come on businesses out there, get behind your vision, get behind your business and go and expand. This is the time to expand. Take on those challenges because the big payoff is when the economy does fly, your business is going to be in a good position to take full advantage of that growth cycle. So it’s really important to understand.

In terms of property again, I just want to harp on this point. I am concerned still around the oversupply story that we are going to see in high and medium density accommodation and certainly, some of the price acceleration that we are seeing in the outer suburb and in those greenfield areas. That is a little concerning for me. Obviously the mentality is, now with this low interest rates, more people are hopefully entering the market which is great for construction jobs, great for tradies, great for retail sales in terms of buying all those home-wares that we need to make a house a home for ourselves. But on the other side of that is we are potentially going to overshoot the valuation and then when we see the correction and the higher cost of money and higher interest rates because remember, a mortgage is for the long term, usually 20 odd years or more, we don’t want to be caught up in then being not able to afford it.

Now what it does mean in terms of wrapping this up is we are definitely going to see interest rates lower for longer. Between 1993 and 2007, we saw interest rates averaging around that sort of 7% – 7.5%. What I think we would see for at least the next decade is interest rates probably hovering around maybe 5% – 6% as an average. That’s potentially good for stimulus but in terms of real growth and real improvement to our living standards and the wealth that we hold, it’s just pushing the value of these assets up artificially for the short term and we may not see that wealth passed on to our household in the future. So asset selection is still going to be absolutely critical in terms of when you are looking to invest in property.

Let’s wrap it up. Rates down, the government is looking to stimulate the economy. They still want to see that spare capacity moving and they thought they would move it now rather than doing something later to get that stimulus flow through as we lead into better weather and hopefully more spending over the Christmas period. So, as anticipated we’ve got that but is this the last of it, well I think it’s going to come down to the global story and then the broader consumer confidence and sentiment that we are seeing in the marketplace as well as where is inflation going. By dropping this, we might see a little spike in inflation and the RBA will be happy with that as we move away from any deflationary pressure that we have. So that’s a wrap for this month.

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