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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – March 2015

Today the Reserve Bank of Australia decides to keep rates on hold after dropping rates by 25 basis points last month. Now looking at the Board Meeting minutes from last month, it was a bit of a flip of the coin whether they were going to drop rates in February or potentially wait until March. Ultimately, we all know the outcome of that. They did decide to drop the rates in February so that would mean that we would obviously see rates today remaining on hold.

Now the next time we are sort of going to see some pressure around rates could still be this side of the first half of the year. A lot of commentators are thinking maybe May or June might be the time unless they see some deterioration in the marketplace. Let’s get behind those numbers and again, if you’ve watched my video on why the RBA dropped 25 basis points in February, then you would understand that a lot of this got to do with the business environment as opposed to the consumer spending.

Consumer spending is actually going fairly well and we’re obviously seeing prices in houses going quite well and we are seeing forward construction around housing approvals. There’s a lot of approvals in the pipeline as well. So that’s all good for the general economy but what we are actually seeing just recently is the capex announcement around business spending. This is the real concern for most economists and most commentators in the space. What we saw in the December quarter is the decline in capex expenditure from businesses. Now that was lead mainly by the mining sector. But what’s really positive was actually non-mining sector’s capex had improved in the December quarter. That’s the first time in the last 5 quarters that we’ve actually seen some manufacturing of capex expenditure in that area. That is a nice sign. The problem is however, that in terms of the forward estimate and the forward outlook is that the capex is looking to decline somewhat further. We are sort of seeing it in the mining sector, naturally, we know it is still coming off its highs but the non-mining sector is also struggling with confidence and sentiments. So the forward projection around capex expenditure is of a softer number. That’s not great. We also saw the RBA obviously make the right call, they knew something that we didn’t around unemployment and they saw unemployment coming around 6.4% in the last set of data. Now that’s the worst since August 2002 and we didn’t get to this low even during the GFC period. That being said, we are actually seeing on the counter balance of that is the ANZ job ads and those kind of things actually coming through. So really good numbers of enquiries and good job ads coming through. Here at Empower Wealth, we are also looking for new staff as well. Obviously our business is going well.

Now, coming down to the final point we want to make around the numbers and where we see rates going in the short term. I’m still sitting on the fence to say rates on hold and I know I did said that before in the last cut.

There is definitely a change around business confidence and we need to see businesses get on board and start to invest in capital expenditure and also in expanding their businesses. That’s an important message and until we see that, we are going to fumble around unemployment rate remaining stagnant and the overall economy probably under-performing.

The RBA knows that they’ve got inflation under control and they do have the ability to push the lever again and take rates even lower. The only caveat to that is the property market. We’ve already seen clearance rate in both Melbourne and Sydney at really high levels and we saw a slowdown coming in to the end of last year but now that rate cuts has certainly spur on more buyers. Interestingly enough and I did say this prior is that First Home Buyers had left the marketplace but I didn’t believe that they have left the market in the numbers that were predicted. So in reality, we see the ABS adjust those numbers and we do know that there are a lot more first home buyers coming into the market. With more first home buyers coming into the market, that’s going to drive the consumer spending and it may be consumers that lead us out of this current slowdown and business catching up as oppose to the other way around.

Now, we need to see an enormous amount of lifting by the consumer market to actually continue to see our GDP numbers get higher. So let’s wrap it up. This conversation around interest rates is very much around business activity. It’s not so much around consumer activities. Sentiment around job security is still going to be there and it’s going to be a worry but we need to see businesses doing more. If they do more, then rates will remain on hold for longer and we will see interest rates go higher probably in 2016. If not and the RBA know that they’ve still got some more leverage on the monetary policy side of things so we will see interest rates go lower. How much lower can they go? Well, that’s a crystal ball gazing but if they go further than another 25 basis points it would surprise me immensely but I’ve said that before and I’ve been surprised before. In this prediction game, you are not always going to get it right. So if interest rates do get lower, that’s great for those of us who have got mortgages but for retirees and those people who have got money on term deposits, its horrible news. So we might see some activity into the equity markets and also some more people coming into the property market from an investment point of view because they are seeing better returns than what they are actually getting from the banks.

 

(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.)

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