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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – May 2015

Today the Reserve Governor and the Board met and they’ve dropped interest rate once again to 2%. So following the February rate cut, they’ve followed it up with a May rate cut.

Now the reason behind that is simply the spare capacity that we are still seeing in the economy. They’ve made a judgement call, even before we see the May 2015 budget being released, that the economy could use with a little bit more stimulus. So this monetary policy decision will hopefully support the fiscal policy work that the government is doing to build up sentiment confidence in the business industry and also continue driving consumer sentiment around spending and consumer confidence. Even though we saw a surprise number in terms of an uplift in employment in the March data, we saw 37,700 jobs created in that time and the Reserve Board is saying, “You know what, that’s in the past. We need to look into the future.” We still see that spare capacity as we see the slowdown out of the CAPEX in the mining sector. Now we’ve seen iron ore prices and raw minerals starting to increase in price and I think one of the other triggers might have been the rising Australian dollar. Last week, we saw the dollar basically rise around 5% of its lows and that may have been another concerning reason why the RBA had said that we need to move on rates. They’ve done that so now it’s time to see how this sits.

Now, I would suspect that that’s how its going to be for this cycle. I’m one of these people who is confident that the construction activity that is occurring, the approvals that are coming through the housing sector and the flow on to the broader economy are going to see these rates at this low levels not for a long period of time. That being said, when I say those I mean, the historically low level. But I don’t see rates getting up to that 7% or 8% period for many many years until we really see the economy firing.

The other reason I think the RBA decides to pull the trigger for this month was the inflation data. The inflation data was nice (1.3% at the time this video is produced)  and clear that there was capacity so the genie again is well and truly in the bottle. We are in a position now where we can see the opportunity for the Reserve Board to pull the trigger and that’s exactly what they had done. We will see a couple of weeks before our lenders passed on those cuts and those savings to the household. It’s still going to be a challenge to all those deposit holders and retirees who are looking for alternative means in which to park their money to get decent returns other than in the banks and term deposits. That is going to put pressure on housing prices so I do hope that APRA and the Reserve Government will actually work together in terms of thinking about ways in which we can slow down this aggressive activity that is happening in the market.

And you know, I’m a Property Investment Advisor, it’s what I do. I am concerned about certain market.

Sydney is definitely the hottest market in the planet at the moment so for those people who are looking to get into the market and this being a stimulus, I would say tread with caution. It is a dangerous marketplace to get into.

We see these cycles, be fearful when other are greedy and be greedy when others are fearful. What we are seeing is FOMO (Fear Of Missing Out) occurring in the property space and this is going to be a catalyst for that. Be sensible about what you are buying. Stay within your budget. Make sure when you are looking to purchase property that you factor in interest rates and being able to service loans at around 6% because remember, your loan is for the long term. It’s a 30-years or 25-years loan so rates will eventually get higher so it’s important for you not to overpay because you are fearful of missing out.

It’s an interesting time in our economy. Let’s hope that these final bit of stimulus in the monetary sense with a bit of smart fiscal activity from both our federal and also our state government will see us through to even further prosperity. Incredible to think that we’ve had such an amazing run into an almost 25-years of positive economic growth. It’s an unbelievable story. Thanks to our Asian partners in terms of looking to work with us on our export driven activity. It’s an incredible story and we’re very fortunate and now it’s time to see what this rate cut will do and let’s look at next month or the following month but for now, this is it. I think it’s now time to start thinking about fixing a portion of your loans and basically enjoy the rates while you can. If you’ve got spare capacity, potentially start paying down some of your mortgage or look for opportunities where you can get a better return on your money other than in term deposits.

Thanks very much for watching.

 

(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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