RBA Rate Decision – December 2017

At the December board meeting today, the Governor and the Board has kept the cash rate on hold at 1.5%. This is the sixteenth consecutive month we’ve seen the cash rate remain on hold at 1.5%.

Now, the big news has been around the announcement of a Royal Commission into the banking sector to try and bring a bit more transparency into what’s happening there. Personally, I think it’s a political stunt. I don’t think we will get any further value out of it that we weren’t already going to get out of the inquiries. The fact of the matter is, it’s been announced and it’s happening. So we’ll see what comes of it over the next 18 months as the Commission takes shape, and we start to see some of the findings come through.

 

Okay, now let’s talk about the cash rate and why there might be some pressures on the rate rising versus the rate remaining where it is.

 

Firstly, the argument for a rate rise are these:

The overall business conditions have improved, so we’re seeing business sentiment, business confidence and also business spending start to increase. Now, that’s a positive sign because we’ve been talking about this for a long period of time as we transition from the mining boom. We needed to see more of this investment coming into the non-mining sector, and this is starting to happen.

We’ll also see a fairly big program of infrastructure spending around the country; and that’s all good as well.

This flows into jobs, and we’ve also seen a positive number around unemployment. The unemployment numbers been going down, and this means that, obviously, more people are becoming gainfully employed.

We talked about the capacity before — so the spare capacity in employment. We’re also starting to see more full-time jobs being created.

These are the signs that the Governor and the Board need to be focusing in on, and that’s why they’re starting to push the argument higher.

Now, if we overlay this with their forecasts around GDP — in other words: how strong the economy’s growing — in late 2018 and 2019, they see the economy picking up. That’s potentially going to be their argument to push the cash rates higher. Remember: 1.5% cash rate is what they consider “emergency levels”.

So, it’s important to understand that they would love to lift the rate a little bit higher so it gives them some flexibility in the cash rate lever. But that’s where we sit right now.

 

The reason why they haven’t been moving is because there are still some problems. There are still some issues that they see in the economy.

Number one: there’s no real justification to raise rates because we haven’t seen strong income growth. Okay, so when you don’t get strong income growth, you don’t get people who are able to spend more. This flows into consumer confidence and spending. We have seen retail spending and overall consumer spending, is down, and general consumer sentiment is a little bit softer than we would like to see it. So this Christmas New Year retail period, this Christmas spending period, is going to be important to see this data coming through in February and March to see whether there’s going to be any changes.

We’ve also seen that they’ve been able to move, in terms of cooling, the housing market. The macro-prudential changes being made are definitely having an effect, in terms of the demand on housing prices. We’ve seen house prices now starting to cool and in some markets like Sydney, we’ve seen some small corrections so far. We might see further correction in the Sydney market as we move into next year.

 

The final piece of the puzzle here that’s challenging for the RBA, is around the Australian dollar. Now, the Australian dollar is still stubbornly high, sitting around that 75 – 76 cent mark. We’d love to see it down around the 70 cent mark because, obviously, it’s good for our exports. If we put interest rates higher then it pushes the Australian dollar higher as well. So that’s why we’re not necessarily seeing the RBA pushing the button on the cash rate.

 

So there you have it. The cash rate will remain on hold for the end of this year and potentially into the second half of next year. That’s when we’ll start to look at those other economic drivers — so those big drivers around business. If they get those right, we see the inflation start to rise, we see income start to grow as well, then we’ll start to see that imbalance and they’ll potentially pull the trigger where they’re more confident in the overall economic story.

Before I leave you, Happy Christmas and a Happy New Year. Make sure you stay safe over this period and get around the family and friends and spend some quality time with them.

 

Thanks for watching.