RBA Rate Decision – November 2015

On this Melbourne Cup Tuesday, the RBA Board met and they’ve kept interest rates on hold for another month. Now, they has been a lot that have happened in the last month and I’m going to spend a few minutes talking about that.

The first thing we saw is an out-of-cycle rate rise for mortgage holders, most importantly, not business lending. Just mortgages. That’s a sign and I’ll come back to that in a minute. In addition to that we are seeing the second tier lenders and the other lenders that are now following suit and the ones that haven’t announced, trust me, if you think you are getting a better deal, they will move rates up higher.

Now, why have they done that.

They’ve talked about the need to have a strong balance sheet, we’ve talked about APRA in terms of wanting the Banks to be more financially secure in the Top 25 of lending institutions around the world. They want to see that happening and so, part of the process has been about strengthening the balance sheet. They’ve gone out and done capital raising and now, they’ve also asked their mortgage holders to actually pay for a bit of that capital raising and strengthening their balance sheet.

So that’s one argument. But the other argument is behind the scenes. What’s going on behind those closed doors.

We are seeing APRA coming out and restricting borrowing power so the Reserve Bank certainly want to have the opportunity to be able to adjust rates if they need to but they need to get all of their ducks lined up.

I’ve said this to you before, when you’ve got low cost of funds, it does starts to see asset appreciation because the cost of money and borrowing becomes easier and that does puts asset prices higher. But they simply don’t want this to occur in the residential market. We don’t want to see further strong growth in residential prices and that’s important for the sustainability of our economy and our overall economic output. If we have a correction and a big correction in the market place that’s going to affect sentiment and there is going to be financial ruin around the place in regards to what happened because it changes buyers sentiment and people will start to move into their shells and not spend anymore. That hurts job. So it’s really important to understand that this move is a sensible move. Even though rates are on hold and we saw a low inflation number last week, that gives the bank the opportunity to drop rates further, we are actually still on hold. So they’ve said, let’s just wait and see because inside the economy, we are actually seeing some positive signs. Business confidence is a little bit stronger. Consumer confidence is also up. Inside the Westpac Survey, one of the interesting things about that was, they asked people around employment and their confidence around their job security. That number had come down significantly which means people feel more comfortable in their jobs. So those types of factors are playing out to see that there is some real confidence around the general economy outside mining. A further support of that is some of the numbers coming out around capital expenditure. We are starting to see good capital expenditure outside of mining and manufacturing. That’s a good sign and I come back to that point before.

You’d noticed that they had changed interest rates with regards to residential lending but they didn’t touch business lending.

And I suspect that if we do see another rate cut, you’re not going to see it from a residential point of view. So we’ve seen around 15 to 20 basis points higher in terms of what we are now paying as mortgage holders. If we do see a rate cut, what would happen is we definitely won’t get that full 25 basis points passed on. But it will be passed on to businesses and that’s an important message because the business community is what’s going to drive us out of this and into stronger economic activity and back into that nice sweet spot of 3% economic growth. So inflation is in check. There is capacity for the Reserve Bank to basically make those changes. So there will be some considerations around interest rates to the negative in terms of reducing interest rates but don’t bet on it from a household point of view. They’ve done enough in the household sector in terms of building approvals and construction in the residential sector, they now want business to come to the party. So if they do move rates, it’s all going to be a story about the Banks passing that on to businesses so that business lending becomes cheaper and the economy start to move outside of this residential construction building component that is already being set up.

So interesting times. Rates on hold but there would be some changes in the coming months if we still don’t see that business activity getting stronger and stronger. If we see that business activity start to flow through in the numbers, then I suspect rates would be on hold but there is room for a move down and we’ll just have to wait and see what happens next month.

 

(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.)