RBA Rates Decision – November 2010

Unless you have been living under a rock you would by now know that the RBA lifted the official cash rate by 0.25% to 4.75% yesterday afternoon.  The first rise in over 6 months.  They saw it prudent to move the cost of money higher, in light of the relatively strong economy and a growing global outlook.  This will most likely be the last rate rise for 2010, and that means that February is the next time the cash rate comes under the microscope and there is a lot of economic data to flow under the bridge between now and then.

I’ve been mentioning for some time the key data for Cash Rate movements is GDP, Consumer Spending, Inflation, Employment (& Wage Growth) and, Asset Values (House Values).  The RBA moved the cash rate up because it saw GDP moving higher, it is believed inflation is set to move upward and has evidence of strong employment and possible wage growth.  The only key data area that is not firing is consumer spending.

For me, consumer spending is what’s going to limit further rate rises, as those with mortgages struggle to allocate surplus income to consumables, given the rising cost of repaying their mortgage.  Basically, what I am saying is the affordability equation is one that will ultimate slow future cash rate increases.  How?  In very simply terms, if you have no money to spend on discretionary items, then those discretionary businesses suffer to a point where they lay off staff, which affects employment levels and ultimately impacting GDP, which will slow the economy.

So the million dollar question is – what’s the magical level of retail interest that will slow us?  Bill Evan from Westpac talks about this retail level being around 7.5%, from which point affordability will be a major barrier to economic growth, affecting employment and hopefully therefore seeing rates no longer increasing and potentially seeing them come down again.

One thing is for sure…..interesting times ahead.