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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – March 2016

Today, the reserve government and the board meet and they have kept interest rate on hold for another month. Now it has been an interesting month, past month, we saw the labor party come out with negative gearing policy changes. What’s interesting about this negative gearing policy change is the way they’ve decided to treat new and existing property. Now I am not going to spend a lot of time to talking about it in this video. But if you want further information about it, Bryce has done a great video on our newsletter and on our how to session (Is negative gearing good or bad?) and we’ve also done a lot on it in terms of unpacking what we think the consequences are in our Property Couch Podcast. So you can visit propertycouch.com.au. It’s Episode 51 and we really unpack what we think are the negative elements of the negative gearing changes.

Back to the RBA and the cash rate, even though we haven’t seen the cash rate movement from the RBA for some time, what we have seen is the bank moving their rates. They are arguing Basel 3 and all these types of things, cost of funding and secured financial system. But the reality is that we are not paying the same sort of cheap interest rate that we were paying around six to twelve months ago. And I did tip that in the previous RBA announcements video that I did. So we’ve seen those movements occur and that does give RBA some capacity to drop the cash rate below 2%. If we see the further sort of the increment movements or what I call margin gathers or margin gains from our banks. So just be mindful that it is giving the RBA capacity to move.

So what’s going to make them want to move slower? Of course, it is about GDP, it’s about getting the economy moving and filling up that space capacity we have in our employment side. But what’s interesting about that is the unemployment rate is actually holding very well. So right now, I think the governor and the board are saying we’re pretty happy where things are and I don’t disagree with them. So I don’t see a rate movement down anytime this year. Now, there’s always a caveat to that because there’s current economic activity in what we are seeing. Now, we have seen some data come out around forward CAPEX expenditure and forecast and they are a little bit softer. So that would be a concern if we do see business slowing in regards to CAPEX expenditure and what that would have in terms of economic activity.

The other thing which also a worry for me is the equity markets. They have been very choppy. In fact, we have seen 20% drops in the equity market in the last 12 months. Now, when you see those types of drops that changes consumer confidences. If we see housing prices came down as well, all of a sudden consumer confidences and consumer sentiments are affected. When people feel happy about their value and their wealth, they will go out and spend. And that’s what we need. We basically need to spend our way out of this sort of economic change as we move again away from mining boom into the more general economy activity. So it is important to understand this position. If we see a slowdown in economic activities, the RBA has the lever to pull to drop the cash rate lower and play around with monetary policy. If they don’t see a need for that, we will probably stay again at that 2% level.

The other thing I want to talk about is the Chinese Economy. So China is an interesting one in the sense of the economy activity and the growth that’s happening in China is actually slowing down significantly. So that type of impact will have a flow on effect the Australian economy. You know they are our largest trading partner and at the end of the day, some our economic prosperity over the last decade have certainly been on the back of China. So it’s really important to understand what happens in China, we need to watch that. Not only for our equity but also for our general market in terms of what’s going to happen for GDP.

On the flip side, the US seems to sill ploughing ahead with some better economic numbers which is a positive sign for the global outlook. I mean the US economy is a significant player in terms of the world economic activity and so, to see positive signs continuing out of the US is actually a good thing.

The last thing I want to talk about was the housing, how the housing turns this calendar year. So we’ve seen some of the auction clearance coming from Melbourne and Sydney is very high, around that sort of late 70% mark and that’s quite interesting. Because that would normally say that there will be price growth in those types of results when you see auctions clearance rate doing that type of thing. So that said, it is on smaller volume that we usually expect this time a year, especially in Sydney. So a lot of people are sort of, I supposed, waiting and seeing but what it does mean that there are still a lot of buyers out there in Sydney and Melbourne market. So I don’t expect to see the numbers for the first quarter of value growth come in, in negative. In fact, I see them come in, in positive. Now that could be a little bit worry for the RBA again, conscious about asset bubbles, making sure that the economy is moving sensibly and we are not getting this sort of bubble affecting in the asset market, especially in residential housings.

So let’s wait and see what happens over the course of the March results in regards to auction clearing rates and general economic and housing activity. And then we’ll call next month video when we see it. Thanks for watching.

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