RBA Rate Decision – December 2014

Today the Reserve Bank of Australia (RBA) Board meets and kept interest rates on hold at 2.5%. The cash rate is now been at 2.5% since August 2013 and the Reserve Bank board won’t actually meet until next February so we’re going to see this low monetary policy position for the extended period. Inside the minutes of the last meeting, it was also very clear that the Governor and also the Board are really keen to keep interest rate at this level but don’t have any appetite to drop it any further. Even though of late there have been a bit of commentary around the Reserve Bank having more ability to actually drop the rates a bit lower. I don’t think that is going to be the case, I think its very clear that housing problem around prices at the moment is weighing on the Governor’s mind and also the Board’s mind. So for me, interest rate on hold potentially throughout the whole of 2015 but again, it is going to come down to a lot of factors.

Let’s explore some of those factors affecting cash rate decision. Gross Domestic Product (GDP) is obviously softening, we’ve seen Treasury over the last 6 months adjust their forecast figures for growth, that is a concern. Unemployment is going to be a concern. Big economies such as Victoria is actually looking to slow so that’s a bit of a concern for government. In terms of looking at other things like inflation. We’ve had a good inflation number, 2.3%, absolutely good number but what’s going to happen now is the Australian dollar is now between 85 – 86 cents. So we’ve seen that comes off. In fact, in the last 12 months or just over 12 months ago, we are at parity. That’s been a big correction in terms of the dollar. This will obviously mean that imports is going to be more expensive which would eventually put some pressure on inflation but with the softening economy, what does that mean for actual real price pressures around increases in terms of labor cost and so forth. We know the labor market is flat so we don’t anticipate any income increases in terms of real wage growth. That is a good news story for the economy. So we are delicately poised. Sentiment are actually reasonable good in the consumer world and we are going to see a forecast around 5% increase in consumers’ spending over this coming Christmas period. So there is confidence out there in terms of mom and dad household but we actually don’t see the confidence in the corporate area.That is going to be a problem for us. We need to see businesses getting more confidence around how the economy is and investing back into the economy, investing back into their jobs and providing more opportunities for people to join the workforce.

So its an interesting period. I think it is going to be one that is quite flat. Our lead indicators into the New Year are going to give us some further evidence as to see whether interest rate are going to increase in the second half of next year. But for now, interest rates on hold for longer at a lower price point.

(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.)