RBA Rates Decision – February 2013

The RBA left interest rates on hold today, which was expected by most economists and commentators, although the inflation data was lower than consensus opening the window for a possible cut.  However the strong employment position would have outweighed the need for a cut right now.  So the cash rate remains at 3.00%

This easing cycle has seen the cash rate move 175 basis points from it’s last high, however this time round the monetary policy adjustment hasn’t had the same impact as it has had in the past.  Usually when the RBA makes access and the cost of borrowing money cheaper, as much as it has down in this cycle, the net result is a real tangible pickup in economic activity.  This time we haven’t seen this response.

A combination of factors is at play here, in my humble view and they include:

• High Aussie Dollar: When you reduce the cost of money in the economy, it makes borrowing cheaper, but it also make return on savings in bank deposit less.  Nevertheless compared to other western economies our cash rate is high, so better returns can be found by parking money in Aussie Dollars and the stable economic conditions add to the demand for our currency, hence it is kept higher than usual.
• Bank’s haven’t been playing fair: Of the 175 basis points adjustment to the cash rate, the banks on average have passed on only 135 basis points.  So the impact on the economy is that mortgage holders are still paying more for their mortgages than the RBA would have liked them to pay.  Paying more on a mortgage means less disposable income to spend to help grow the economy.
• Consumer and Business Confidence:  Although our economy is the envy of almost every country in the world, internally the gloom and doom preachers have done a great job in affecting our psyche and confidence, which has the direct effect on us being conservative and frugal with our money.  So pre GFC, we were too ‘credit happy’ with personal spending.  And for the record, the paying down of personal debt and some households focusing on savings has a net positive effect on the populations balance sheet, but again less spending means less jobs and less economic activity.

In light of this, NAB recent released their forecast for the cash rate for 2013.  They are extremely bearish on the rate, forecasting a move to 2.25% – that’s 75 more basis points lower from its current position.  Commonwealth Bank and ANZ are seeing no further rate cuts in 2013.  Westpac are forecasting another 25 basis points cut to 2.75%.

For me I think the housing market is going to be the key to rates for 2013.  If the market remains flat then I could see 25 to 50 basis points cut over the year.  However if house prices start to heat right up again, I don’t see any more than 25 basis point or no further cuts at all.  And my view on the housing market is that we will see price growth in 2013, so the cash rate for me will not go below 2.75%.

 

(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.)