Laura Akhurst - 6 Sep, 2016

Rates on Hold as Glenn Stevens Steps Down as RBA Governor

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eChoice RBA Commentary for September 2016

The RBA have left the official cash rate on hold at 1.5%.

This decision was based on:

o A change in the RBA leadership;

o Australian income growth stagnating;

o Unemployment remaining stable; and

o A need to constrain the growth of the property market.

On the 18th of September, Glenn Stevens will end his ten-year reign as governor of the Reserve Bank of Australia (RBA). The RBA deputy governor Dr Philip Lowe will step into the hot seat and serve a seven-year term. This change and last month’s RBA decision to lower the cash rate are said to be significant moves that may give the Australian economy the stimulus it needs. As a result, the cash rate has been left on hold this month to analyse the impact of these changes.

The Change in RBA Leadership

Dr Philip Lowe joined the Reserve Bank in 1980 and has been the deputy governor of the financial institution since February 2012. Lowe takes the helm at a pivotal time in Australia’s economic history as the country continues to recover from the Global Financial Crisis (GFC).

With inflation extremely low in advanced economies worldwide, including Australia, economic levers such as the official cash rate managed by the RBA, are proving to be less effective than in the past. Dr Lowe has stated that lowering the cash rate below 1% will have no economic benefit whatsoever.

Firstly, says Lowe, it’s unlikely that banks will pass on the full 50 basis point drop to borrowers. Further rate cuts will also erode super fund returns, and increase financial pressure on self-funded retirees. However, Lowe does not deny that another rate cut may be on the cards if a suppressed inflation persists.

Australian Income, Debt and Spending

Economists are predicting that another two rate cuts are highly likely, one in late 2016 and the other in 2017. These predictions are due to the growth of wages in Australia being non-existent and high household debt reducing the amount of spending by consumers.

According to the Household, Income and Labour Dynamics in Australia Survey, which tracks 17,000 Australians and their living standards, household disposable income is less now than in 2009. The survey, which began in 2001, found that financially households were better off in 2009 with disposable incomes increasing from $57,000 to $77,000. Between 2009 and 2011, the GFC inhibited household incomes by around 5%. Today, these households are estimated to be around 7% worse off than in 2009. Therefore, Australian families have a kerbed their level of spending.

The lack of consumer spending is stalling business growth, with the rate of business investment continuing to fall across the nation. A survey conducted by NAB in July, before the last official rate cut, recorded a decline in business sentiment with the sector weakening over the month. However, the sector remains above long-term averages, which is a positive step in the right direction, especially regarding employment.

The Rate of Unemployment

Australia’s unemployment rate fell by 0.1% during July to 5.7%. According to the Australian Bureau of Statistics (ABS), the economy added approximately 26,000 new jobs to the market, and the level of unemployment decreased by 5,500.

On average, between 1978 and 2016, Australia’s rate of unemployment has been 6.93%. This result is due to unemployment in Australia reaching 11.10% in October 1992, and dropping to just 4% in February 2008.

The Australian Property Market

The property market in Australia has strengthened with the introduction of new lending standards. Major lenders have also taken a more cautious approach to lending, which has kerbed investment growth in this sector. As a result, the market is growing at slower rates.

With dwelling prices across Australia rising at moderate levels, leaving the official cash rate on hold this month will help to stabilise the market further. Overall, growth in lending for housing has subsided, though this may change as a considerable supply of apartments are scheduled for completion the next 12 to 24-months.

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