RBA Rate decision – June 2013

Although Shane Oliver (AMP Capital), a high profile economist, had predicted another rate cut this month, the RBA decided to leave the cash rate on hold for now at its board meeting today.

Bill Evans, another high profile economist (Westpac) was also in the cut camp until only last week, when some positive data and the declining dollar swayed him back to a hold position.  However he is still very confident of further cuts, as he is predicting another cut in August and the cash rate to bottom out at 2% into the March quarter of 2014.  The other banks, Commonwealth, ANZ and NAB are all still forecasting one further rate cut this year to bring the cash rate down to 2.5%.  Great news for borrowers, but not so much for bank deposit holders.

A further reduction in the cash rate later this year is a clear sign the domestic economic outlook has these economist worried.  The decision by Ford to cease manufacturing cars in Australia from 2016 is again a sign that our manufacturing sector is continuing with a structural adjustment, as our high labour costs, high energy costs, highly regulated marketplace and until very recently our high dollar put pressure on our global and local competitiveness, both on an export and import basis.

On a positive note for manufacturing, the fall of the Aussie dollar under parity with the US dollar will make us more competitive from an export perspective, but on the flip side will see inflationary pressures pushing our CPI figures higher, as things like petrol and our imported goods costs rise.

Consumer spending has softened after the positive lead we experienced in the early months of 2013 and Employment (although currently holding firm in the mid to late 5 percent range) forward indicators such as job ads are showing a decline, so one can expect a slightly higher unemployment rate into the future, which bodes well for the justification of another rate cut later this year.

On the property front, we are seeing first home buyers coming back into the market, along with investors and this is evident in the more established areas.  The next test for the market will be new green field locations with their house and land package offerings.  If this market starts to really gather forward business, then we will see a mini construction lead recovery, and as the mining cap ex dissipates we see a workforce moving back to city location to resume their trade activities back on the tools, which will be a positive sign for the local economy and also ease the need for further rate cuts.

I mentioned in my last comment on rates, that I’m 50/50 on a further cut – it could happen if the next round of economic data is poor, say around August/Sept or if data is better than expected then maybe we have hit the bottom.  Again, one thing I am reasonably confident about is that I do believe for the next couple of years I can’t see rates moving above 6.50%, which when you look at the longer term averages since the RBA became an independent body, retail rates have been around the 7 – 7.25% range, so money may be cheaper for the short to medium term.  Only time will tell if I am right or not….

 

(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.)