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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – February 2018

Today Governor Lowe and the Board met for the very first time in 2018, and they kept the cash rate on hold at 1.5%.

Again, no surprises there. The reason for that is because inflation numbers came out last week and the overall year-to-date number for 2017 was only 1.9%. We all know that they want to keep the inflation bandwidth between 2% ­– 3%; but we only saw in the December quarter a 0.6% rise in inflation, led by transport education and housing costs going up. But, of course, all the things we’re importing at the moment is getting cheaper and cheaper; in terms of our technology and our non-discretionary stuff. So these have obviously left the inflation figure at that lower point.


I wanted to spend a minute with you and talk about historical inflation.

We’ve got data from 1951 through to 2017, and I want to share with you some of the biggest and smallest quarters. Overall, over that extended period from 1951 – 2017, the inflation rate has, on average, been 5.04%. That’s quite high considering we want to keep it lower than that — and that’s the great job The Reserve Bank has done with the monetary policy. It’s really incredible to see that is now low. Because higher inflation obviously means higher pressure on the household budget.

The peak was actually in the fourth quarter of 1951, where inflation was running at greater than 23%.

The smallest quarter, in terms of the biggest decline, was a -1.3% quarter in 1962.

They are big numbers.

It’s interesting to watch how inflation has tracked over the longer period. Right now, globally and also locally, we’ve got record low inflation, which is obviously the reason why we’ve also got very, very low monetary policy and the cash rate is sitting at record low levels.

Overall, The Reserved Governor and the Board have clearly said that is not the means for actually extending or increasing the cash rate, even though they’re quite eager to get it off these record, what they might call emergency, low levels.


Part of that story is also around employment.

We saw a fantastic number: over 400,000 people found work in 2017. That’s an incredibly good number, and the Government, Federal and State Governments, need to be congratulated on creating that many jobs.

The unemployment rate still sits at 5.5%. This is still high and we still have a fairly high underemployment number in there as well. So the Reserve Board are going to be watching it carefully because, broadly speaking, global economic news is really positive. We’re seeing good numbers out of Europe, we’re seeing America doing well, and we’re also seeing Asia doing really well. Globally, there’s a lot of confidence in the market place and that is fed through to business confidence here in Australia and also consumer confidence here. So that is good news.

Once we see inflation moving higher, and we also see that spare capacity in the employment market getting absorbed, we will see rates go higher. So that’s the cash rate.

But, importantly, this doesn’t mean the banks won’t move rates outside of cycles.

We saw what happened last year — in terms of changes around interest only lending and also investment lending.

The new release of the Basel III paper came out globally, and there’s some interesting reading in there that is concerning to me, obviously as an investor, in regards to residential property investment.

What they do is they set risk ratings in different loan-to-value ratios. Loan-to-value ratios is the difference between the value of the property and the loan against that property. These risk ratings are different to APRA’s risk ratings.

We’re possibly going to see APRA come out and give their guidance around the LVR risk rating.

The higher the loan-to-value ratio; the higher the risk rating. Potentially, what they’re talking about here is giving different risk ratings, depending on the type of security and where the income’s coming from to service that loan.


Let me explain it. If we get an owner-occupied debt then the income to service the loan usually comes from working. Okay, but if we get an investment property, we’ve got income coming from the rent to help service that property. Basically, what Basel III and APRA are looking at, is how much of the rental income coming in from that property is actually used to service that debt.

The higher the proportion, they’re putting a higher risk rating on. This could leave the banks to argue that they could potentially increase investment lending. And that’s concerning for us because, ironically — and this is my most important point to all the bankers out there — the default rate of the un-servicing of mortgages is usually higher for owner-occupiers than it is for investors.

Yes, obviously we have seen more investors coming to the market because they can see how great property investment can be, but it’s also important to understand that they may be hitting us a little bit harder, when I might argue that there’s greater risk in delinquency rates in owner-occupied mortgages as there are in investor mortgages

So that’s one to watch. Even though we think the cash rate won’t change and if it does, it won’t be at a large level, we also need to understand that it doesn’t stop the banks from moving rates a little bit higher.

So, as I’ve always said, make sure you’ve got a buffer. Make sure when you’re doing your household budget that you can factor in, at the very minimum, one hundred basis points difference — so 1% difference — in the interest rate you’re paying. But, more conservatively, it should be more 2%.

Don’t overextend yourself in personal debt and personal household expenditure if you can’t service this. Start putting this money aside, putting it in the offset, and building up that equity to make sure this money works for you in 2018 and beyond.

Thanks for watching.



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