RBA Rate decision – November 2013

The RBA once again has left interest rates on hold at their board meeting today. So the cash rate still remains at record low levels (2.50%). If we look at the RBA Rate Indicator at the start of November only 5% of the market watchers expected the cash rate to be reduced at this meeting.

So where are the rate’s heading?…

Well it’s still very much a crystal ball gazing. It’s my view that rates will not change this side of Christmas and I think I live with the majority of consensus with this view. Recent data in the housing sector regarding new construction is on the up. Housing (and unit) construction is an important provider of GPD growth within the economy, given its direct impact on jobs and economic activity during the construction stage and then the flow on effects through increase retail activity as people furnish their homes and buy household goods.

Further on the housing front, the RBA and others are very conscious about rising property values and do not want to see property value get ahead of themselves (bubble). Glenn Stevens’ speech last week at the Citigroup investor conference highlighted that the RBA is paying close attention to property values and his current opinion is the price growth we are experiencing is a cyclical growth and not a bubble forming. The reason, why this is important is because if he and the RBA believe values across the broader market are getting too hot, they will look to move to a tightening cycle on rates.

The decision today says the RBA is happy with the current monetary settings for rates, but if the housing markets ‘plays nicely’ then they do know they have the capacity to ease rates into the New Year. Triggers that would indicate further easing of rates include a continuing sluggish and slowing Gross Domestic Production (GDP) number and the reasons behind this number.

The most notable being the high-ish Aussie Dollar. Glenn Stevens comments at the Citigroup conference around the Aussie dollar being over-valued and in his view, the value not being supported by any real fundamentals did exactly what they were intended to do in reducing the currency. However, he and the RBA realise that with continuing soft global economic growth and cheap interest rates across the developed world, they may need to bring the cash rate lower to bring the dollar down further, which will help us sell our products abroad.

Another indicator the RBA will be looking at is business confidence and spending, which in turn also impacts on jobs growth. If the RBA sees increased business activity outside the slowing mining sector they may be encouraged to leave rates as they are for now. If confidence slides once again they may be called upon to move rates lower.

Finally the biggest indicator of all watched by the RBA is inflation. The September inflation reading was a little higher than most economists had forecasted, but as long as it is still within the 2-3% range the RBA likes to keep rates low. During the early stages of the July to September quarter the Aussie dollar did experience a reasonable fall in value which had an impact on the CPI basket of goods, namely higher petrol and imported goods prices. With the dollar increasing since those recent lows, this might have a positive result on the next quarterly result for CPI meaning the RBA will be happy with where the inflation levels sit. One thing is for sure, just like if we see property prices increasing at unsustainable levels, if CPI figures move out of the RBA range, it’s fair to say this current easing cycle will be over for now.

In the short term, time and the reporting data will reveal all……

 

(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.)