RBA Rate decision – May 2013

The decision for the RBA to reduce interest rates this month, took most economist and cash rate commentators including myself a little bit by surprise.  Sure the recent economic data highlighted our economy was losing its mo-joe, but again there were signs for me around greater buying activity and strong employment that lead me to thinking there might be a rate cut sooner rather than later, but not this month.

Maybe the board took the view that if a cut was needed in the next few months, why wouldn’t we bring that forward to this month?  It is a pretty reasonable conclusion to take and in doing so they were seen to be pro-active in their attempts to see the economy moving forward, as opposed to stagnating.

Given we are now a couple of weeks past this decision and the smoke is settling and economist are digesting it, the conversation is now turning to what’s next.  Is there a need for RBA to ease the monetary policy further?

Both NAB and Westpac agree that further easing will be needed.  Westpac’s Bill Evans is bullish on greater easing, talking up the potential of the cash rate moving down to as low as 2 percent in this cycle.  Similarly, NAB is also forecasting another rate cut later this year; bring the rate to 2.5 percent.

St George on the other hand, believes there is no further need for easing for the remainder of the year, but as with any economist and their forecasts, there are plenty of caveats being issued as part of their conclusions with their predictions.

It is clear in the Reserve Bank’s statement following the cut, that they are concerned about where the next growth for the economy will come from as the mining sector’s ‘heavy lifting’ of the economy starts to reduce.  Their commentary around the higher dollar and its impact on our competitiveness in manufacturing in a global marketplace was a strong influence on their decision to cut rates, and maybe something that drives any further cut to rates.  However, we need to note that the dollar did react, as the RBA had hoped reducing to around parity with the US Dollar.

Picking the next move on rates at this point is a ‘guessing game’.  And I’m putting myself out there once again to call rates as remaining on hold for the remainder of the year, unless global events force a change, as I’m a little bit more optimistic about the local economy than some commentators.  However one thing I am more and more confident each passing month is I see the cost of money remaining lower than the long term average of around 7 percent for potentially the next several years, which only mean as good news for all borrowers and not so good news for those who are looking to getting any reasonable returns from putting their money in the bank!

 

(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.)