RBA Rate Decision – July 2015

Today the Governor and the Board met and kept the cash rate at 2%. We saw changes in February and also in May of this year and now again, the Governor and the Board is basically just waiting to see what happens.

The biggest news story at the moment is obviously the Greece story and they have default on their loan. In last weekend they have had their referendum which allowed them to vote “No” which they did. So this is an interesting time for what’s happening in Greece and what’s happening to the European Union and obviously the Euro. The Euro is really important for countries like Germany, France and the bigger countries who can actually trade-off the smaller economies because it brings the Euro value down which makes their export so important in terms of their general GDP and economic activity. Let’s get back to Greece.

What does it mean for them? Well, in the grand scheme of things, Greece as an economy is only around $242 billion dollars which putting it into context is only around half of New South Wales GDP. So in terms of global they are extremely small.

But the big word that you are going to hear soon is this word about contagion. What does that mean for the European Union? Are we going to see countries like Spain, Portugal and potentially, Italy to see what’s happening in Greece and how they are being treated by the EU. And the would say. “OK, if they don’t have to pay their debt back, what about us? Maybe we should do the same thing”. Now what’s interesting if you take Spain as an example is you are seeing these anti-austerity party get some momentum. Recently in the May election in the regional area we saw some of these areas support rise for the anti-austerity party. Now they’ve got their major election November this year and they are going to be watching very carefully in terms of what the EU does. The EU will make a decision this week and then they would be working through that decision. Are they going Greece into the mire and let them fend for themselves which frankly from my personal opinion is probably the best thing to do for Greece. They need to stand on their own two feet and what would happen to their economy is they will obviously suffer significantly for the short term but over the long term it’ll be better. It’ll re-calibrate them and it’ll make their wages better. I mean they will be lower wages but then they will start to attract some opportunities in regards to businesses outside of Greece looking to use Greece for their labour force and do some manufacturing and that kind of things. Which again, is going to see Greece struggling in the early stages and probably in the next 5 years be very poor but eventually coming out of that. We saw that in Argentina when they’ve also defaulted from their loans as well. It’s the recession and potentially the depression that they had to have to get themselves back to a level of footing to grow themselves. I mean, in fact, if you actually look at Greece’s history, they should never have been invited into EU in the first instance. They were actually hiding a bit of debt thanks to their friends at Goldman Sachs and on Wall Street we saw that come out in the GFC. So for me, I think there needs to be a strong hand from the EU. They need to make an example otherwise we would see a contagion effect. Now that would mean potentially that the Euro might grow in value because obviously when you don’t have these smaller and lower economically performing countries, it would mean that the value of the Euro will grow a little bit against global currencies such as the US Dollar and Australian dollar.

So that’s what happening in Europe and in the grand scheme of things, back in Australia, we still need to focus on Asia.

Asia is our doorstep, we are in the Asian century and China has made some changes in terms of their economic activities in terms of reducing some of their tight control they’ve put on to try and make inflation under control. So what we are seeing in China now is a little bit more stimulus in terms of internal stimulus to try and get the economy to keep growing at the magical 7% GDP number. We’re also seeing India starting to grow and Japan has a fairly good time as well in the last 12 months and that’s a good sign for us. We do a lot of trading, they are historically one of our biggest trading partners. In fact they were our biggest until China arrived on the scene. So they are all good news story for the Australian economy in terms of how we are poised.

Domestically, when we look at our economy, sentiment has really improved post-budget and we are starting to see the tax incentives do some heavy lifting and we are starting to see the numbers flow through in the next couple of months in regards to what actually happens to the $20,000 depreciation incentive. Generally speaking, the Australian economy is doing ok. A little bit slower than we like it. There’s still some spare capacity but again, and I know this is a bit of a repeated message but as we move away from the activities from the mining CAPEX expenditure which is now lacking, we are moving into a recovery around construction. In terms of the housing market and general constructions, we are seeing more and more of that occur. Our story over the next decade is going to be a story of immigration and growth in population. Quite frankly, we need to do it. If we don’t grow that population then our GDP will suffer. Our services to Asia is going to be important and our commodity sales up into Asia is going to be critical in terms of seeing economic prosperity move forward. So it’s an interesting time. There’s not a lot to report on the cash rate. I suspect the cash rate won’t change even in the second half of this year even if we see a deterioration, maybe globally led by the Greeks or domestically, if we don’t see some of that capacity and we don’t see some of the business confidence and CAPEX outside of the mining sector and some growth in our manufacturing then we might see one more adjustment. But for me, I’m still saying interest rates on hold and I would like to think that in 2016 we might start to see rates go a little bit higher. But they will be lower for longer as oppose to the long term historical rates around 7% – 8%. I suspect we’re going to be around that 5% – 6% for a decent period of time until our economy really starts to pick up that spare capacity.

Thanks so much for watching.

 

(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.)