- 1 Mar, 2016

RBA Aims to Encourage Business Investors Despite Banks Raising Rates Independently

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eChoice RBA Commentary for March 2016

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

This decision was based on:

o Inflation being near target;

o The Chinese economy not expected to have an impact on Australia; and

o Unemployment rates remaining steady.

The Reserve Bank of Australia (RBA) remains confident about the local Australian economy and has left the official cash rate on hold. The RBA has said that as the economy shifts away from mining it feels that conditions are steadily improving, despite banks making independent rate rises.

While the RBA are confident that the Australian economy will continue to improve, economists are saying that the Australia dollar is continuing to rise and then fall without it showing a high degree of continuity. In addition, the RBA are waiting to see what impact global markets will have on the domestic economy. At this point, the RBAs main focus is China, which has moved into negative interest rates in what many are calling a sign of desperation by policy makers.

It is predicted that if the RBA are going to make a move and change the official cash rate, then it is likely that they will do this in September of 2016. The main reasoning behind this, say economists, being that the RBA have concerns that the lowering of the official cash will have a negative effect on business investment and that it may not encourage home buyers to purchase property as the RBA continue to try to alleviate investor interest in the market.

The Australian Domestic Economy

Our economy remains positive. Household consumption has increased and low interest is supporting consumption growth and dwelling investment. The downturn in mining investment is expected to peak before the end of the financial year. The RBA are still concerned and frustrated by the lack of non-mining investment. However, it is expected that the drag from mining investment on the economy will lessen later in the year.

While business investment is said to have marginally increased, it is anticipated that recent rate rises to business loans will curb this in the future. This comes after the Australian New Zealand Banking Group (ANZ) made an independent rise mid-January from .19 to .23 basis points on business loans, despite the RBA recommending that the bank did not make any rate changes.

China

It is expected that longer term structural factors, such as a decline in growth and productivity across China, due to an aging population, will continue to erode the Chinese economy. These deflationary pressures are said to be magnifying concerns that a high level of debt held by China is increasing and may interact with slowing economic growth.

Where the Chinese economy is headed is anyones guess and a game of speculation. But, despite the nation having such a high level of involvement with Australia there are no real concerns that its economic slow-down will have an adverse effect on the Australian economy.

Inflation Figures

Inflation is very close to target, but uncertainty has given the RBA reason to pause. While the Australian labour market appears to be improving, the RBA are not persuaded that this is a long-term change.

Unemployment

While there is speculation that the rate of unemployment may not be accurate due to ratios within the labour force affecting overall participation rates, the RBA are confident that it will remain around 6%. Though the unemployment rate is expected to fluctuate due to a below-average GDP.

Housing

In overinflated property markets, such as Sydney, there is a real risk that real estate prices may rise ahead of rents, and that vacancy rates will climb. This is expected to be more prominent in the commercial sector, with businesses feeling the pinch. This, in turn, could have further impact on business investment.

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