RBA Rate Decision – October 2015

Today the Reserve Governor Board met and kept interest rates on hold as widely expected. However, they has been some interesting economic events that has occurred over the last month. Let’s look at those in details.

The first one I want to look at is the market volatility. There is a lot of share market volatility and globally speaking, there are a lot of headwinds that we are facing in terms of economic output across the developed nations around the world. We are seeing the Americans who are predicting their rates to come off, virtually zero, haven’t actually moved at all because of that market volatility and now we are starting to see that maybe rates won’t move in the States until probably, early into the New Year. Then, let’s turn to China who is obviously our greatest trading partner. Now, what we are seeing in the Chinese market is a softening of their GDP. Now that GDP is an important number for us because they do so much buying our raw materials. So the flow and effect is our mining stocks has been smashed in regards to their share price and just general market sentiment has kept that volatility in the market. So we are seeing this bounciness happening around economic output, economic activity and what that is doing to our share market prices.

Now, the other big move that we saw in the last month has been a new prime minister, sliding doors, Malcolm Turnbull has arrived as the new leader of the Liberal Party and because they are in power, he’s take on the prime ministership. What that did for business confidence was really important cause obviously, Malcolm has a lot of business acumen, he has been very successful in business as oppose to Tony Abbott who has been a career long politician hasn’t necessarily been that long in the corporate world, Malcolm has. We are going to see a big focus on the economy and a big focus on innovation which is exactly what we need because at the end of the day, we are not seeing enough work done by businesses to get this economy moving.

So not only it is the responsibility of big businesses but also, small businesses to get that happening so we do need things like tax reforms, we do need more support for innovation and entrepreneurial type of activity to get the economy moving forward.

It’s important that we look at that because the headwinds are these, when you get volatility in the stock market. When you get concern and we are seeing that in the sentiment numbers and the confidence numbers, you actually start then see people starting to retract in their spending and what they are doing. So let’s think about those, let’s look at the NAB Business Survey. In terms of business conditions, we’ve seen a real increase in regards to business conditions and I suspect that is a flow on effect from the low Australian Dollar and I’ll talk about the low Australian Dollar in a moment. In terms of consumer confidence, what we’re seeing is softening numbers so we are down at around 99. This consumer sentiment survey has been running since 1974 and in round terms, its average around 101 – 102 with the worst number ever was back in 1990, I think it was in November of 1990 where we see consumer confidence at around 64 – 65 and the best ever was around 2015 in January where we saw consumer confidence at 127 – 128. So in the grand scheme of things, we are not at that chronic low level and we are certainly not super optimistic. We are sitting in the middle so we are on the fence and that’s why we need great leadership, good confidence, business getting out there and spending money to keep the economy moving. If we don’t do that and if we pull up into our shell and stop spending, then what we might get into is potentially that ‘R’ word and I don’t want to talk about it just yet because I want to be positive about the economy but if we do start to see that sentiment, those headwinds, start to get very negative and the whole sentiment becoming really negative, we would move into a technical recession. A technical recession is two quarters of negative GDP. Now, in the last quarter our GDP was only .2 of 1% so we almost had a negative quarter and that was after the budget stimulus of small business spending so we are going to face some headwinds moving into the economic future of our country. So what’s that going to mean to interest rates medium to long term? Well, that’s probably more risk or more likelihood of further reduction to the cash rate into the new year if the economy doesn’t seem to be picking up momentum. We could see one, possibly 2 reductions in the cash rate if that occur.

Now, to you as a borrower, what does that mean?

Are we going to see lower interest rates in terms of what we’re paying? I don’t think so. Importantly, as part of this message, even though the cash rate is going to go down there is a lot of talk that the actual retail rate, so what you and I are paying as mortgage holders, is actually not going to change too much at all. In fact, I suspect the banks are going to come up with some excuses and APRA and also the RBA is going to put pressure onto the banks to try and make sure that it is not going to lead to a further appreciation bubble. When you see very low cost of money, that is exactly what you get in terms of asset appreciating. That rising tide lifting all the ships. So I suspect there might be a concerted focus on reducing that cash rate to try and focus on business activity as oppose to domestic or residential activity. We don’t necessarily need much more of that. Now, that would hopefully focus on more construction work, more in business investment, more business lending which would get that economy moving forward.

Now, I wanted to talk about the Australian Dollar. The good news with the Australian Dollar hovering around 70 cents, want to get it down a little bit lower. Probably around 67 – 68 cents is a pretty amazing country, it could go, if we go into recession, as low as 65. In my terms, I think 68 is where we are probably going to finish up. If we have a good economic pathway and good recovery, we’ll probably sit around that 70 – 74 cents mark. Now, what is a low Australian Dollar good for? Naturally, it is good for our exports. It’s good for our manufacturing, it’s good for our primary production, selling all of those agricultural goods, our meats, cheeses, dairy, all of that are really important. But secondly to that, there are two other areas and one of the area that has been sluggish of late has been immigration. Immigration has been slowing so I suspect a low Australian Dollar, we want to encourage more and more foreign students to our universities. Those foreign students are really really important for the long term future. We need a growing population. We have a really high wage cost, it makes us less competitive in manufacturing so it’s really important that we bring these new immigration in, they get their qualifications and hopefully they secure a visa and they stay and form part of the great multicultural Australia that we currently enjoy. If we have that low cost in terms of low Australian Dollar, we get foreign investments and foreign students coming in and they are going to do some of the heavy-lifting that we need because they will build up our population, they’ll rent the properties that we’re building, the investment properties that we’re building as well which is really important until they stabilise and buy their own home here in Australia. The other important thing with low Australian Dollar is tourism. Inbound tourism is going to be important part for building GDP. As we transition from the CAPEX expenditure in the mining and we move to mainstream production and a softening production at that, we are going to need to look at these types of industry to bring those people in so I expect Australia to be flavor of the month again in terms of international arrival coming to enjoy the beautiful nature that we have here in Australia. Really really important and I suspect some of the domestic tourist may be looking to put off their holiday because the dollar is lower and have an interstate holiday instead such as a short break up in Queensland. That’s going to be good for Queensland, it’s going to be good for the Queensland’s economy. Certainly, the North Queensland’s tropical areas are going to enjoy, I suspect, a spike in terms of tourism activity and what’s going to happen in those region as well.

What’s the overall?

So, in summary, we are going to see potentially, interest rates on hold for the long period with a possible reduction in the early 2016. I’m not buying into a rate cut in the next Board Meeting which is the Melbourne Cup November Board Meeting. Some are but I’m not going to go there even though I think from memory, the last couple of years, we’ve actually seen a rate cut on Melbourne Cup Days. I don’t think that’s going to happen, I think we are going to try and ride it out. If conditions deteriorate further, obviously that would mean a rate cut prior to the new calendar year. But for me, I think interest rate are on hold and I still believe that. I don’t think interest rates will go down any lower until we see further deterioration across the broader economy but we’ve all got a job to do. We got to get out there and spend.We got to enjoy. I don’t mind you saving and paying some debts down but we also got to contribute because if that changes, job security changes so it’s a really important message. And I finally want to leave you with this point, on our website in the next couple of weeks, you will see me producing a new video on what’s going to happen in regards to pricing interest rates and pricing mortgages into the future. In the past, we’ve seen mortgages priced based on general .7 or .8% discount off the standard variable rate and the sort of across the board type pricing regime. That’s going to change. We are going to see mortgages go down to what we call risk pricing analysis based on the household and so that is going to be part of this change that we are going to see in terms of mortgages over the next possibly 18 months to 36 months and I want to share a video on that information for you and that will be available under our mortgage section on our website.

Thanks 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.)