RBA Rates Decision – March 2012

The cash rate has been left on hold this month as the RBA believes it has adequately priced the access of money in the economy to ensure the long term growth of the economy. Meanwhile many economists argue the cash rate is too high to stimulate the economic growth, as soft market conditions in the two largest states of NSW and Victoria, have been offset by the mining sector growth in both Western Australia and Queensland.

With the cash rate sitting at 4.25% this does represent a discount to the long term trend of this measure since the RBA was made independent in the early 90’s. As far as the RBA is concerned the rate decreases it provided late last year are still yet to fully materialise in the economic data, and it’s their view that once this data does present itself then their decision to keep rates on hold for now will be justified. Only external events in regards to further deterioration of the global economy or a further slowing of the domestic economy will see rates fall further. I’m thinking a possible small decrease of 0.25% in the second half of this year, but only on the back of global events, not domestic numbers, as I think a housing led improvement to the domestic market is just starting to show potential about now.

Banks moving outside of Reserve Bank decisions

A lot has already been written about Banks breaking ranks with the RBA. In short their decision to make their own commercial calls on what they charge their customers to access their money was purely a Public Relations maneuver to shift the focus from the bank bashing that occurs in the lead up and following each RBA decision every first Tuesday of each month.

The reality is the Big 4 Banks are ‘Market Markers’ and the other lenders are ‘Market Takers’, meaning that it really doesn’t matter which one of the big four banks sets the new price, ultimately everyone else will eventually follow suit with their interest rates to all be around the same competitive price point.

So the total wash up is the banks have somewhat succeeded in taking the ‘concentrated heat’ off them around the RBA decision time and although there is plenty of different lending options out there, the price one pays for borrowing money is very similar between the vast majority of lenders in the market.

Final note: Glenn Stevens has put on the public record that any increases by lenders will be taken into consideration by the board when setting the cash rate. Meaning that if lenders put up their rates outside the RBA too much and this slows the economy, then a reduction in rate based on margin creep of the banks will occur.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decisions 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.)