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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – May 2017

Today Governor Lowe and the Reserve board met, and the kept the cash rate on hold once again in May. That keeps the cash rate at 1.5%, so monetary policy remains on hold, but we now are coming to the month of federal budgets and state budgets. And this is where we start to look at fiscal policy. So what are our state governments and also our federal governments going to do about stimulating the economy and moving forward? Because there’s no doubt the economy absolutely needs the kick gone. If you see the RBA minutes of last month, they were concerned about the sluggishness of the domestic economy. We’ve seen, and we continue to look at unemployment sitting around 5.9%. Now what that means is where their concern is around the spare capacity, we’ve talked about this before, we’ve seen around a million people who aren’t working at their full capacity, and that’s precisely what the role monetary policy is about.

Now let’s come back to the Federal Budget. The federal and state budgets are going to be factoring in some infrastructure movements, and we’re going to see the federal government trying to position this argument between good and bad debt. So spending our tax payer’s money on what is going to stimulate the economy and what’s good for the long-term return as oppose to maybe some spending that isn’t giving us that return. So we’re definitely seeing some stimulation in infrastructure, we’re going to see some money set aside for education and training, and we’re also going to see some money for health. So that’s good things.

On the other side of it, we’re also going to talk about housing affordability. Now, this is my big message, so I’m going to come back to that in a moment. I also want to look globally to see what’s happened in the last month. We’ve seen the US stock market rally quite considerably to record high levels. Now, this is on the back of proposed tax cuts and also planned, big infrastructure spending. So the markets like that, because they can see all of that capital flowing into the US economy.

The Chinese Economy continues to surprise on the upside with GDP numbers still above 6%. Now that means again, part of what’s happening in terms of the central federal government in China, what they’re trying to do is working for them regarding trying to get that domestic economy moving stronger and stronger on spending. They’ve also done some things around housing. Values over there are smart because you can also get into a bubble environment over there. So they’re starting to cap some areas around housing. I think that’s sensible.

Then we go to Europe. We’ve seen obviously the French elections to Elect a new President in round one of that. And the markets also like that because we didn’t see that internal socialist far right type play coming in. And for the far left; the two areas are not necessarily open to global trade and so forth, well they didn’t get up so you would have liked to think that we’re going to see France continuing in the EU, and that was positive for them in the markets.

We also saw in the UK where their Prime Minister, Theresa May, may look to a snap election to work on her Brexit programme to get the UK out of the European Union.

So a lot is going on, but enough stabilisation to see the markets generally around the world going ok. It’s still back here in Australia that poses our biggest problem. We’ve had this construction boom which has led to terrific numbers, and in all honesty, we’d be in a recession if it wasn’t for this construction led recovery after the mining boom. We are still failing to see though, businesses invest in their businesses to grow the economy and to borrow money.

That’s why the monetary policy is still a struggle for the RBA.

Even though the cash rate will be on hold, when we look at our households, what’s actually been happening is we’ve been charged more. We’ve seen a couple of rate rises outside of the RBA cycle. Now we anticipated that, and we’ve mentioned that to you before. And I don’t think that’s going to stop. It all comes back to the property market and the values of properties growing too quickly. There have been reports by the OECD when they’ve looked at property booms and busts is that a lot of them, almost 60% of them end in recession. So it’s really important in terms of how careful the government changes these macro-prudential regulations. If they hit it with a sledgehammer like Labour is proposing, well that’s definitely going to affect house prices. What they’re doing is to do it strategically through APRA, and there are three things that they’re really trying to focus on:

 

  1. The first thing they looked at was Serviceability. They were trying to stop the amount of lending happening especially to investors in the market. So they’ve tightened up, or put a higher buffer on servicing which means, the borrowers can’t borrow as much money as they could in the past. That’s a good thing.

 

  1. They’ve also looked at Interest Only Loans. Even though our clients know that we’re very bullish on interest only lending in the past, including for our principal home, there are people out in the marketplace that is using interest only functions in the wrong way. In other words, they’re buying their new family home, stretching their family budget too high to get that family home, and not factoring in the ability to pay that mortgage back. So that’s going to put pressure on those people buying those properties at those higher ends. Sensible to see some type of tapering for interest-only lending. If you do have interest only lending on your own borrowings, and then have an offset attached to that, then it’s going to be a case by case basis. So we’re asking you as our clients to come and talk to our mortgage advisors again, to have a review of our own situation. Because it’s going to come down to case by case. We’re a big believer in keeping money in offsets and you being in control of liquidity, but it’s really important to get that review done. If you haven’t had a review in the last 18 months, then we encourage you to reconnect with us, update our financial status in your fact find and then talk to one of our brokers and we’ll be able to review that to see what your best option is.

 

  1. Now coming back to the third thing that they’re looking to do. They’re trying to reduce that serviceability but also, Responsible lending guidelines. So ASIC’s also getting involved. Making sure the banks are actually lending responsibly. All these things are just about taking layer upon layer out of the property market to slow the demand side down, and we think that, that is prudent.

Again, if we did see a big correction in the property market, we would see less general spending. The wealth effect will basically be conservative. They’ll stop spending in retail, and we’ll see further job losses in the retail sector, and potentially take the economy into a recession, which is obviously not what we want. So it’s an important time. Everything is going to be placed on Scott Morrison’s May Budget that’s coming out in a couple of weeks. And I’ll talk more to that in next month’s review. But for now, the message here today is, it’s time for a review of our financials so make sure you reach out to your professional, or if you’re an Empower Wealth client, make sure you reach out to one of our team here, and get a review on your current situation, and we’ll design a tailored solution for you. Thanks for watching.

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