RBA Rate decision – July 2013

Although the RBA still has scope to move on rates, as indicated within minutes of its last board meeting, they chose to leave rates on hold this month, which was in line with the market consensus of most economists.

Helping them with this decision was the movement in the Australia dollar, which has now found a base around the 92 cents US.  The US dollar has gained ground on the Aussie due to a couple of factors.

Firstly, the lowering of our rates has made it less ‘rewarding’ for other markets whose cash rates are at extremely low levels and hence deposit returns are virtually nonexistent, to park their money here on the prospects of higher returns on deposit compared to most developed market alternatives.

Secondly, the US economy (the world largest economy) is still starting to show further signs of improvement within their own domestic economy.  Consumer confidence is lifting and the housing sector continues to improve, which drives up demand for US dollars as currency traders and buyers see potential of a currency correction, just as we have seen a current decrease of the AUD.

For those not familiar with currency trading, the USD is the number one accepted trading currency across the globe, which means most import and export transaction use USD, rather than the respective currency of each nation making the trade, once again putting demand layers on USD.

The movement in the AUD against the USD is great news for our mining and manufacturing sectors, as our exports are cheaper.  On the flip slide, imports will be more expensive to land in here and this might have a margin impact on inflation over the coming quarters.

So the RBA has been able to achieve one of its objectives in devaluing the dollar, partly their good work, but also the US rising out of the doldrums as noted.  Their next challenge if they choose to accept it is to continue to use their lever as controllers of monetary policy to get the corporate sectors interested in lending to drive economic growth.  However, make no mistake, theirs is not a lone hand in this challenge, they do require help from the government in fiscal policy to also play their part in building business confidence.

For me, that requires one more rate cut for this year and then a wait-and-see approach considering we may have a new federal government in power and a third Prime Mister in as many months.

The other view I am forming around interest rates and this view is in its early days of deliberation, is that we might be in for an extended period of very low interest rates.  By extended period I’m thinking upward of 5 years where rates might stay under 6.5%, which is around 0.5% to 1% better than the longer term rates since the Reserve Bank of Australia was decoupled from the government of the day and made an independent body.

This view is being formed based on the level of debt being taken up by households and businesses this time. In simple logic terms, if you lend at low rates you do so because it is affordable at the time. As rate moves 100 basis points higher than you originally purchased then your discretionary spending is impacted, which again in simple terms impacts the overall economy and its gross domestic production.  So in the next upswing in the rates cycle we might reach a point of economic flat lining sooner than we have in the past.

It is early days yet with this call, but I’m going to watch the number of first home buyers entering this market at these low levels and if there are enough of them along with renovators and upsizers around the country, my prediction just might materialise.

 

(Those people 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.)