RBA Rates Decision – March 2013

The RBA decided to keep interest rates on hold at their March board meeting, as they sit on the fence waiting to see further data flowing through from the significant easing on the cash rate they did last year.

Critical figures released last week show there are certain signs of a slowing in the capital expenditure in the mining sector.  Although figures were higher than most analysts had forecast, the slowing of capital expenditure will eventually flow through to the GDP numbers moving forward.

So the ‘two speed economy’ that being mining and then the ‘rest of the economy’ might not be something we talk about too much into the future as this adjustment takes place.  However it’s important we don’t understate the heavy lifting this sector does for our economy, as it will still be doing well for a long time to come. Having said so, it won’t be the massive driving force of our economy it has been for the past decade, and one could argue this lessening of Cap Ex will provide an argument for downward pressure on interest rates as the ‘rest of the economy’ struggles to pick up the slack.

On the flip side is housing prices.

The New Year, which from a mass property perspective kicks off in February, has seen a very clear pick up in property enquiries and major cities are reporting better than expected clearance rates, which indicates price growth.  The Reserve Bank, would not take kindly to any indication of a property bubble forming.  We only need to look at what happened in the US which triggered the GFC and a property bubble would be, and I’m using my words carefully here, ‘extremely damaging’ for the entire economy, due to the incredible links the housing sector has to government revenues and employment.

So, if we see price growth across the board in most major cities, then in my humble view, we won’t get any more rate cuts in this current easing cycle.  In fact the next rate movement would be more likely up, if the property market heats up too much.

The perfect outcome for the RBA is one which sees the broader property market have some small growth, say 2 – 5% this year.  This will be enough to stimulate first home buyers back into the market, which will help construction and retail jobs and overall GDP.  The RBA would be OK with some of the blue chip areas experiencing growth rates around the 10-15% range; it just doesn’t want this to happen in the mortgage belt or the broader market right now, as this will cause the potential of that bubble I mentioned as properties in the outer suburbs could already be argued as being overpriced for what they offer.

 

(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.)