Debbie Shankar - 7 Jul, 2015

RBA Playing the ‘Waiting Game’

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eChoice RBA Commentary for July 2015

The RBA have left the official cash rate on hold at 2.0 percent.

This decision was based on:

o A need to assess the impact of the May rate change;

o The Australian dollar needing to depreciate further;

o Further economic growth being required;

o A need for business investment to increase;

o A growth in wages being required;

o Household incomes needing to increase; and

o Employment rates continuing to rise.

The official cash rate has stayed on hold as the Reserve Bank of Australia (RBA) assess the impact the May 2015 rate cut has had on the Australian economy.

Over the past month Australia has seen stronger growth in the Gross Domestic Product (GDP), employment and business confidence, as well as housing, but retail figures continue to decrease. Based on this, many economists are predicting that very little will change over the next 12 to 18 months, especially considering that international markets are still unsteady.

However, in saying this, the Reserve Bank of Australia governor Glenn Stevens says he’s not concerned about Australia being affected by the recent Greek debt crisis. This is due to Australia’s exposure to Greece being minimal. Furthermore, the governor doubts that the impact will result in a wider global market crisis or further turmoil.

Mr Stevens said in a recent speech at the Official Monetary and Financial Institutions Forum held in London last week, that the RBA’s view on the Australian dollar needing to depreciate further is still a necessity. At present, the Australian dollar is trading at between US75c and US77c, but economists believe this needs to fall to US70c to US73c.

Mild concern was held by Mr Stevens over the impact of the US$11 trillion stimulus packages that global central banks had introduced since 2007, and what impact these could have on the market’s liquidity. Mr Stevens said that he and other market participants felt that the underlying liquidity of many markets is not what it used to be, and that it will add challenges when the interest rate tide turns. He anticipates this happening in the US in the near future, but said that it may be many years before global monetary policy returns to normal, especially with the central banks introducing untested regulatory tools to control asset price bubbles.

The Australian Prudential Regulatory Authority’s (APRA’s) introduction of a 10 percent a year growth cap on lenders in May 2015 has done little to curb property investment. Housing investor credit growth remains at a seven year high of 10.4 percent per annum. Yet, lenders have vowed to slow their growth over the coming months so that they comply with the APRA cap. Given this, economists feel that landlord loans will slowly begin to decline in the second half of 2015.

In order to boost the Australian economy, Mr Stevens and other economists urge governments in Australia and worldwide to generate fresh growth so that the global GDP increases by 2 percent over the next five years. Australian economists say that while the economy is listless in its growth, as it transitions from mining into non-mining investment, there are still signs of life.

Household incomes have been temporarily increased by the decline in oil prices and consumer sentiment was average, rather than below-average. However, income growth is low compared to historical standards, and this is likely to hinder future consumption growth.

Additional spots of movement in the economy include growth in housing construction, a rise in the Australian population and home prices and a lower Australian dollar, which is predicted to reach US73c by the end of 2015. This, in turn, will help to reduce costs and create employment.

The strength of the housing construction industry and the increase in housing prices are expected to provide additional consumption support. Growth in housing credit for owner-occupiers remains at 6 percent over the last six months while housing investor credit grew at over 10 percent over the same time.

Many economists feel that Australian profit growth will remain low unless new sources of income and employment can be found. While early 2015 official rate cuts have helped to increase consumer spending and investment in dwellings, the central bank has given investors a distorted image of the market. As a result, the market appears to have a reduced risk that could be dangerous in the future for investors who have entered the market to purely make a higher yield. They also urge that the return to a ‘normal monetary policy’ will have an impact on investors if they do not prepare themselves for change.

Furthermore, despite historically low interest rates, business is still reluctant to invest as they wait to see an increase in consumer demand. Unfortunately, this is creating what can be referred to as a ‘vicious circle’ where lacklustre economic growth and a slow growth in wages are keeping consumer demand in-check.

To date, the rate cuts Australia has experienced during 2015 have not had enough time to make an impact on the economy. But it is hoped that current Federal Budget measures to support small business may assist. Undoubtedly, as far as the RBA and economists are concerned ‘only time will tell’.

Are you seeking to take advantage of lower interest rates by paying off your home loan faster? Then contact eChoice, and discuss how you can possibly reduce your debt now.

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