RBA Rates Decision – September 2010

The cash rate remains on hold for another month as the RBA sits on its hands awaiting the latest inflation data for the September quarter due out 27^th October.

There are growing concerns that the global recovery is stalling and we are heading for a ‘W’ shaped recovery rather than the ‘V’ shaped one the global economic stimulus tried to achieve.  Further slowdown in economic growth across the world could have an impact on commodity prices as demand for China’s exports slow.  It’s clear that the mining sector has played a very big part in helping us through our domestic issues during the GFC.  A slowdown in this sector, coupled with an overall slowdown, could in fact see interest rates on hold for some time to come.  Any further deterioration of the economy might possibly see interest rates falling, but let’s not count our chickens just yet.

Employment is still strong and there are signs of increased business investment which is a positive for the economy, as the government stimulus starts to taper out of the growth numbers.  This is a positive for our GDP, as we saw with our latest June quarter figures of 3.3% growth. If the RBA continue to manage inflationary pressures via their cash rate lever, once again, prolonged flat interest movements may be around for a few months to come and maybe into 2011.  If we as an economy really hit our straps and employment, wage pressures and consumer spending align then inflation might drive us into higher interest rates.  But not too much higher, as too many households debt levels will ensure discretionary spending will slow and therefore employment and overall GDP will be impacted, so I can’t see the cash rate much higher than 6 to 6.5% in the foreseeable future, which means interest rates we pay possibly peaking around 8 – 8.5% in this cycle.

In my view we are sitting well balanced at the moment, so further evidence for either case will sway this view as the data and evidence comes to hand about whether we will be impacted by global events and by how much?  (Remember, this is a personal view from an interested onlooker perspective, not a ‘qualified economist’ view.  However, I do study and spend many hours reading and researching a lot in this space, as property investing is linked into our overall economy).

Therefore managing cash flows remains critical and wise use of equity extremely important during these times.  Those with surplus cash can take the option of building themselves a buffer for possible higher interest rates or potentially investing it to work harder in building your wealth, such as an investment property.  Remembering opportunities are always available in any market conditions, but managing your money remains the foundation of any attempt of capitalising on future opportunities and in uncertain times lower volatility investments should rule your strategy.