RBA Rates Decision – February 2011

As unanimously tipped by all forecasters and commentators, the RBA chose to leave the official cash rate on hold this month at 4.75%. Although the majority of sentiment is that the cash rate will move higher over the coming year, if our economy and the global economic recovery continue to build momentum.

The consensus on the flood in Queensland as well as Northern New South Wales and Regional Victoria is that it may not have the initial impact on the economy as thought, because the rebuilding process will form part of the Gross Domestic Production (GDP) moving forward. The only upside risk with these events this the inflationary pressure on materials and wages for trade persons, as the rebuilding process gets underway.

Economic indicators we need to watch into 2011, that will force the hand of the RBA are:

• Consumers Spending figures
• Employment/Unemployment & Wage Growth
• Inflation
• GDP

In my view it’s still a likely bet that rates will move between 0.5% to 1% this year or within the next 18 months, but after that I just cannot see how they can keep climbing unless the mining sector grows our economy beyond a 4% GDP increase, which is referred to within the financial circles as a two speed economy, that of the rest of the us and then the mining sector. Increases of 0.5% to 1% is going to create very high levels of mortgage and overall debt stress on a very high number of households and this will impact consumer spending greatly.

 

(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.)