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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – December 2016

So much to talk about in this December Rates Announcement! Firstly, we’ll start with interest rates on hold at 1.50%. The Reserve Governor and the Board met and kept rates on hold. Now, what’s fascinating is if we had have waited another day, when our GDP numbers came out in Australia, we could have seen a different result.

As you know, there’s so much going on both domestically and also globally, that it does put a lot of noise and cloudiness around what’s going to happen with rates to 2017. In my previous November rates announcement, I said that interest rates would most likely be on hold throughout 2017. Now we’ve got some economists who believe that there will be further rates cuts and they think that we could potentially have a negative quarter of GDP which we will find out tomorrow. Other economists believe we will have positive growth which could lead to interest rate increases in 2017. If we couple this with a few of the interesting things that are going on globally such as Donald Trump being elected as the next president of the United States of America. Now we have seen the Fed Reserve make the call on their interest rates in the next couple of weeks. We will see interest rates increase in America and that’s on the back of economies actually doing quite well. We have seen strong job growth which has obviously meant that the unemployment rate has continued to fall, so we will see again, more of those interest rate rises, particularly in America. There are some challenges to come. As you would know, Donald Trump has come into power on the back of making America great again, which effectively means, let’s start building things back in America. And so they’ve got this protectionism policy, which has meant that middle America, where the steel belt is, is going to be quite important especially when that is effectively how he got himself elected in.

So what does that mean? It means there are big infrastructure programs happening in America. That means more spending and the other thing he also promised was tax cuts, to bring the multinationals back into paying their taxes as in their profit taxes back in America. It is quite an interesting play because we already see a country that has an enormous amount of debt and I’m not quite sure how lowering tax rates will help. It reduces the tax revenue that the government is going to receive but yet they going on a spending program. So it’s going to be an interesting time to see how this plays out in the next couple of years.

We look now to Europe and over the weekend, Italy went to a referendum to consider their actual constitution regarding how they vote. Italy has had a lot of unstable government. I think it’s over 60 governments in around 65 years. So there is an incredible instability in that point. But that vote has actually been voted down. This means that the current Prime Minister of Italy is more than likely going to resign now. That will then cause all the challenges around the euro, and the European Union because effectively, a no vote against these changes also meant that there is this popular sentiment to break away from the European Union potentially. Now that’s going to cause some uncertainty around EU. Italy is the third biggest economy in EU. For them to exit like what the UK have done is going to mean the death of the Union basically, and that’s also going to cause a lot of political uncertainty and economic uncertainty in that region. It may also be the death of the euro, so this is why this particular rate announcement is quite fascinating in terms of what’s happening globally.

On the one hand, we’re seeing America getting on a stronger footing economically, but on another hand, we’re seeing some troubles in Europe and how that affects the financial markets. And then locally if we do have a negative GDP number tomorrow, where is the impudence to raise rates if the economy is actually slowing down?

Couple that with record household debt, and we’re going to be in situations which are unfamiliar and it’s going to be very difficult to navigate through this particular period. This is the last rate announcement before February, so I suspect with rates on hold now, we’re going to see what Australians spending patterns are over this Christmas period. All forecasts are pointing to a record sum sales over this Christmas and boxing day sales period and then we’ll start to come out the other side and start looking at the data in February. But right now, the rates on hold, reasonably uncertain times, bond markets have also turned and this is an important story, which meant that fixed rates are also now starting to rise.

Couple that with record household debt, and we’re going to be in situations which are unfamiliar and it’s going to be very difficult to navigate through this particular period. This is the last rate announcement before February, so I suspect with rates on hold now, we’re going to see what Australians spending patterns are over this Christmas period. All forecasts are pointing to a record sum sales over this Christmas and boxing day sales period and then we’ll start to come out the other side and start looking at the data in February. But right now, the rates on hold, reasonably uncertain times, bond markets have also turned and this is an important story, which meant that fixed rates are also now starting to rise.

And I will leave you with this point, one thing I do believe is for sure, it’s uncertain about where the cash rate will be. It’s more likely that we’ll see a cash rate increase in the future markets from these record low or these emergency settings. But we are definitely going to see the banks start raising rates outside of the RBA’s policies. We’ve seen it all in the fixed rate market, and we’ll also start to see out of cycle rate rises by the banks as they argue that their cost of funding overseas has now increased and they’ll be passing this on to us borrowers.

Now let’s round that out in terms of the property market. It will actually be a welcome cooling of the property market if we see several rate rises in 207, and that’s good. It won’t just cool the market; it corrects some areas of the market. Some of those corrections will be more than likely in the outer suburbs in the new house and land package areas, and it’ll also put further pressure on the unit market where there is an oversupply at the moment. So you know, long term is looking pretty good. But I suspect we will now start to see sentiment and confidence in the property market in 2017 start to slow around the middle of the year and we’ll start to see some values declining in most markets especially the Sydney and Melbourne market. There will be great buying opportunities around that time. Thanks for watching.

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