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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – May 2016

On this budget Tuesday, the Reserve Governor and the Board met and they’ve dropped interest rates. Now this is the first interest rate drop since May of last year. So it’s been 12 months but they’ve decided to pull the trigger on the cash rate and lower in that cash rate.

Now what’s interesting about this is, if we actually go back two weeks ago and look at the futures market about what was anticipated, there was only 12% chance of interest rates been cut. But what’s changed that position was the inflation data so the January to March inflation data showed what we called, deflation. And that means that the actual growth in inflation was actually negative by point two of one percent. Now this is the first level of deflation we’ve had since really around the GFC period. So it’s been a long time between drinks. Now what Reserve Governors and the Board need to understand when they are setting monetary policies is, this is concerning for them. Because what it basically means is if the consumers stop spending, they think, “Oh everything’s going down – so I’m going stop spending because I think I’m going to get things cheaper in the future.” So it can slow down economic growth quite quickly. In fact it can be quite sharp in terms of the spending that happens, so, no federal government or board want to see that type of thing happening. And obviously that’s where we try and adjust monetary policy. So it’s important to understand, this decision is really about that because, if we actually think longer term, the reserve governor and board have set forcasts of 3% growth for 2016/17 and the following year.

So longer term, they are actually quite confident in terms of how the economic activity is going to play out and they think inflation and unemployment will be within check and so, there’s obviously this short term mechanism that they think they need to move.

I think what’s playing on this is also the Australian Dollar. We’re seeing the dollar rise to a really high level. Definitely higher than where the Reserve Bank and the Board want to see it. They want to basically bring that and have a six in front of it – maybe 68 or 69 cents. So this is an interesting moment in time in regards to why we’re seeing that. And that’s why they’ve pulled the trigger on dropping the cash rate.

Now what does this mean for you and I as mortgage holders? Well that’s going to be the $64 million question. Are they going o pass those rates on? Is that cut going to be passed on to us borrowers? Because in real terms, on one side, they’re still probably watching property prices and they don’t necessarily want to see property prices go as hard as they were going in regards to price growth of 2015. So I don’t know what’s going to happen. I’m interested to see whether they’ll pass on that full cut. I definitely know they’ll want to pass that onto the business sector. But I’m just worried about the actual retail sector, in terms of residential mortgages. Will we see that 25 basis points or more cut or will we only see say 10-15% of that passed on to the borrower? Well time is going to tell, so it may not affect us as much as it actually is meant to do, which was affect the broad economy and getting business spending and getting them employing and just lifting the level of confidence in our overall economic activity.

So there you have it, a rate drop during the budget day. So we’ll see the budget be delivered tonight by Scott Morrison. And there will be more to be said about how they’re going to stimulate the economy from a fiscal standpoint. So the monetary policy has been pushed down and it’s now the time for the federal government to put out their fiscal strategy and hopefully that will build confidence, continue to build business sentiment and that’ll be the last of these rate cuts because quite frankly, we don’t want to be in a position where monetary policy is doing all the lifting. In fact it gets to a stage where monetary policy can’t really do anymore to move the economy on. We only need to look at other countries, European unions, where we’ve got zero interest rates or negative interest rates in those markets because of the deflationary outcomes and activities happening in those markets. So it’s really important to understand that we still need people spending, we still need to have strong confidence, otherwise if we go back into our shells, that’s going to play into the hands of this whole deflation and potential stagnation in the economy and we don’t want that.

Thanks for watching.

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