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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – March 2017

Today Governor Lowe and the Board met, and they kept the cash rate on hold at 1.5% for another month. Now it was an interesting February in regards to what’s been happening globally, and I want to talk about that story because we start to see GDP numbers from around the globe starting to be reported.

Let’s start with the US. We saw some very good GDP numbers coming through and on the back of that, we’ve seen President Trump with regards to his sort of stimulus programme around infrastructure, around potential company tax cuts, and also potentially around giving middle America a personal tax cut as well. Now the stock markets absolutely love that, and we’ve seen the market moving to record territory, and some growth we haven’t seen ever before in terms of how quickly it’s moving. So they are obviously confident that when they’ve got a president that is pro-business, we can see that stimulus coming through, and that’s why the markets are moving so strongly over there.

Let’s go to Europe, where we also saw the actual results being better than consensus in regards to most economists views on where we saw Europe moving, so that’s the positive sign as well.

Now when we talk about Asia, in parts of Asia it’s really important to see our big trading partners such as Japan also had some positive GDP numbers and so did the second half of 2016, we saw China start to move. Now whether those numbers are true or not, but we’ve got to go by some kind of consensus there in terms of what’s happening around manufacturing and we’re starting to see cement, and all the sort of raw materials starting to pick-up, which is a positive sign as well.

Now when we come to Australia, we got a very good number in regards to our December GDP. The GDP was up 1.1% which is better than expected, and that was after the negative September quarter. So, in December we finished off the year quite strongly. That means that our overall economy is growing at 2.4% which is better than most developed nations in the world so congratulations to the Australian economy. That being said, you know, effectively we only own and grew the economy by 5 billion dollars in that 3-month quarter to December. Now the long term average is around that sort of 3.4% so it’s really important that we understand that getting the Australian Economy moving into that area is going to be important. We’re still struggling regarding capacity in terms of people wanting to work and full-time employment. We are definitely seeing more part-time workers and casual workers but they are not full-time employment, and that’s the spare capacity Governor Lowe and the Board are focused in. They are trying to give everyone more work, which then obviously leads to disposable income and a better standard of living.

Now, rounding off the data in terms of Australia. We did see some really positive numbers in regards to business confidence.

The business confidence survey actually popped from 6 to 10, which is the highest reading we’ve seen for a long time. That’s a really positive story!

In addition to that, consumer confidence is also up in this period as well, so again we’re starting to potentially see some confidence around that.

Now is that going to be enough of an appetite for the board to move the Cash Rate higher? At the moment I don’t think so. I still think that we again have that spare capacity in the economy so I’m still of the view that interest rates are going to be on hold longer. But what it also does indicate to me, is that maybe we’ve bottomed out. We did see some commentary from the RBA in regards to an appetite to reduce rates further, especially given the performances of housing prices in both the Melbourne and Sydney markets and that is still a concern for the Governor and the Board. And I don’t think they’ve got an appetite to drop rates anytime soon, and if anything, I think they probably want to look to the next rate movement being up, but again, I don’t think that’s going to happen for the entire 2017 period.

Now, let’s talk about property prices and what ‘s going on behind the scenes. We have started to see banks like the CBA hit their speed limit of 10% growth in their investment mortgage book and that’s concerning because obviously what that means is, effectively, the CBA and BankWest which they own as a wholly owned company, is now going to have to slow down the amount of lending to investors. That’s concerning because obviously, that puts pressure on their margins and so what do they do? They turn around and they start to increase the interest rates investors are going to be paying. Again, very disappointing but that’s what happens when you get this market intervention from APRA. The banks need to make sure that their shareholders are also getting their returns that they expect as well, and so to do that, because it’s too politically sensitive to increase interest rates to mum and dad mortgage holders, but doesn’t appear to be as politically sensitive to increase the investor lending. So you know, even if the interest rates did go lower, I wouldn’t be banking on those rates being passed on to most consumers as the margin pressures in the banks are more and more pressured at the moment. You know, we’re talking about the margins being around 2 to 2.5% so that’s pretty low in terms of profit. So how do they grow profit? They have to bring volume to the conversation as well.

So, rounding that out; interest rates on hold. There are still concerns around the value of property moving in both the Sydney and Melbourne markets so I do expect to see some more pressure. If you are thinking about your own personal household, make sure you are factoring in, in terms of building up your savings buffer, and building up your offset for increased costs around mortgages because even though the cash rate may stay low for longer, I do expect to see more of this flowing through to other banks other than CBA. I suspect the Big 4, and the others will start to take an opportunity to increase the costs of investment loans.

Disappointing for us but on the positive side, for those who own their own property, most property is going up in value and that’s a good result for us. From that point of view, rounding out Cash Rate on hold. We’ll speak to you next month.

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