Earlier today, at their August Board meeting, Australia's Reserve Bank Board decided to leave their cash benchmark rate unchanged at 4.75%.
It's now been nine months since the last rate change (an increase of 25 basis points).
The decision to leave rates on hold was widely predicted, but not before some controversy among economists from the rival banks. Westpac had reported that they believed interest rates may have peaked and could be (eventually) heading downwards. Other the other hand, ANZ chief economist Warren Hogan had predicted an interest rate increase (see who predicted what)
While we wait for the minutes of the Board to explain their reasoning, its likely that rates were left on hold due to the uncertainty in the world economy. Aside from the ongoing issues in Europe, US GDP figures were very soft – revised down for the first quarter and unimpressive for the second.
http://www.huffingtonpost.com/sheldon-filger/us-economy-performing-muc_b_914098.html
Domestically, retailers are hurting badly at the moment, with sales failing to attract much interest and consumers seemingly becalmed by the uncertainty associated with the economy, the political stalemate, and the endless arguing over the validity of the carbon tax.
This uncertainty has dented consumer confidence and highlights an important principle: when consumers get spooked they become risk adverse.
In regards to the property market, an interest rate increase would have been a setback to an already fragile situation.
House price information released for June released by RP Rismark revealed a slight contraction in values: a fall of 0.2% in seasonally adjusted terms. Higher interest rates may have seen an increase in the number of properties for sale, and in a period of already flat demand, prices would have been under more pressure.
Although banks have been known to increase their home loan interest rates independently of RBA movements, the increased competition in recent times mean they are unlikely to do this at the present time.
The RBA's next meeting is scheduled for 6th September.
Did the RBA get the decision right? What do you think will be the
next rate movement? Have your say by making a post in this forum or else read what others' think below.Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Although I'm not a well-informed economist, it appears that the RBA raised the interest rates too quickly to start off with. Perhaps they did this to control an explosive property market, but it is up to debate as to whether or not they predicted the adverse effect it would have on the retail sector. Isn't it possible that Australia could see a recession if the degree of spending stays very low?
I'm no economist either, but the high interest rates are elevating the value of the AUS$ which is severely damaging our export economy. Since interest rates are low almost everywhere else in the world, it is also causing other countries to purchase our dollar, which is seen as a stable currency, this also assists the high $ value.
Everytime the Reserve Bank increases rates, this causes businesses to pass on these costs to the consumer, which bumps the price of everyday goods, toughens the already struggling retail market and inflates the CPI so the RB is their own worst enemy. Kitchen table economics would indicate that a drop in rates would improve the flow of money, helping retailers, ease the value of the $ and improve our exports. Seems to me the RB control freaks don't like fluid economies!!
fWord, I disagree – I’m not convinced that interest rates are the reason for the retail sector’s current issues. Sure, rates affect consumer sentiment but world issues including the sovereign currency crisis and the US economic woes are possibly contributing significantly more to the feelings of angst that Aussie shoppers are reflecting.
While I am hesitant to suggest that our reserve bank is on the money (no pun intended), I feel that perhaps they did OK with dropping rates as they did to help mitigate the immediate effects of the GFC, and then raising rates sufficiently to give us a buffer but keep the economy at an acceptable rate of inflation.
From where we are now, we have the flexibility of being able to raise or lower the cash rate. Should the world economy start to deteriorate, Australia has room to move to drop rates down to give us a boost that other economies won’t be able to afford. Or we can still increase rates if the need arises.
We won’t see a recession while inflation continues to increase.
However, our “two-speed” economy does present a challenge for our regulators.Hi,
In respect to the AUD, take a look at the link below in the section under 'How Bond Rates Could Rise'.
When you look at the alternatives, AAA rated Aussie Bonds at 4.9% looks like a very good option compared to others. I think that is a reason why our AUD is quite strong.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
With the US increasing it's debt ceiling and carrying a total debt in excess of $100 trillion, Federal, state and personal debt, it's little wonder significant US investors like China, ($1T+ in US Bonds) are getting nervous and looking to reduce their exposure in favour of more stable economies. There is a feeling in the FX markets that the AUS$ could go as high as $1.15 US, and the impact of that on our economy will be very significant.
Yes, Our dollar is stronger then other currency's but I think a lot of that strength is stigma from "Australia has a never ending mining boom"
If you want to see what China is doing with our resources check here: http://www.youtube.com/watch?v=SIzbMT2NVDA .. though that is a topic of its own.
Interest rates are still at historic lows and everybody is feeling the pain.. The retail sector is coming apart because people are already maxed with debt and spending a historically high percentage of there earnings on servicing this debt
How would people fair paying off there $600k Mc Mansion if rates where closer to normal levels, like say 10% ?
Yet at the same time, Interest rates can't stay where they are, with inflation increasing investors will turn else where and bonds will require higher yields.
Though if interest rates rise much more, well.. that's when you will probably see the cookie start to seriously crumble
I think we need to feel the pain and purge some of the bad investment in our economy so we can get over this downturn and continue on, Though I don't think the government will allow negative GDP to happen and will step in with "stimulus" to "save the day"
You have seen the government try to keep the property market propped up for years now, FHBG went from $7000 up to $21000 for new homes
The Qld state government has now introduced a $10,000 building "boost"
And the Federal government is pumping millions in to the NRAS scheme to apparently make housing "affordable"
I would like to hear Steves personal opinion on whether interest rates will rise or fall over the coming year and what effect this will have on property prices ?
The US economy is looking really sick. I don't follow it closely enough to know which industry sectors might recover, but the traditional heavy industries and manufacturing such as motor vehicles have diminished and its hard to see where the recovery in revenue is going to come from. Its hard to believe that the US might go broke but thats essentially what could happen. There are humanitarian issues at stake too, there'll be so many more people homeless and destitute. I'm not in a position to do much right now but down the track I'd like to buy some US property and work with homeless agencies to provie crisis accommodation. If anyone has similar goals I'd be interested to hear.
I think the RBA has done a good job with interest rates recently, Glenn Stevens seems to be on the ball. If interest rates were much lower we'd have run the risk of a housing bubble and potentially bigger corrections than we have.i posted a comment in october last year, stating that i thought our economy would be in a recession by now, and we now are, given the mismanagement of this country by the rudd & now the galah goverment, not to mention glen stevens raising rates because he thought something might happen later in the year. i don't believe we were or have been affected by the GFC, apart from the intial fallout with the banks, which the RBA took care of as is there job. there is no confidence left in this country and while people are unsure what this government is going to do next, they will continue to not spend money, whether it's retail,business,housing or anything else. we desperately need an election to get rid of this current woefull excuse for a government. if we wait another 2 yrs, imagine how long it's going to take to get us back on our feet, that is of cause, if there is anybody left with a job let alone a business
Good morning team!
Seems like there is a diverse range of opinions here, and that makes for good discussion.
In regards to my thoughts on interest rates, it seems to be a difficult call. I would err on the side that our economy is under rather than over performing at present. A weak property market, manufacturing confidence is low, as is consumer confidence, building is sluggish… I think we are probably in a clayton's recession – a recession we're having when we aren't having a recession.
I recognise the comments about CPI, but I don't think the increases in CPI are necessary controllable… food pressures from a flood, petrol, etc. Discretionary spend is soft in my opinion.
So, all in all, I lean to the view that rates will be on hold, and, if they do end up moving, I believe there is a higher probability that they will fall rather than increase.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
I think, in the simplest terms, the RBA has been caught between a rock and a hard place for a while now.
So much of the economy and state government reveniew has become dependant on an active housing market. But, if the market is too active and grows less affordable, then the effects this has on retail and other industry is more pronounced.
IRs down and more money should flow back into housing but that wont necassarily help retail and other industry. The $AU would continue it's descent in this instance.
IRs up and everything suffers but, if the housing market continues to correct, eventually it will help retail. It does, intitially at least, make our banking system seem more stable, so the $AU would go up.
So, the RBAs solution is to leave IRs the same. Don't rock a boat that is on rocky water already.
I think a recession is possible where prices inflate and incomes stagnate. I think the GFC is ultimately a US depression by another name. Economic smoke and mirrors abound.
I’m of the opinion the RBA raised rates too much too quickly. Remember pre GFC when the rest of the world were reducing rates our RB increased them again by .25%! I do agree it does leave us room to move if another crisis occurs but will our crisis, if one occurs, be because of all the uncertainty at home? Every month is the same, economists putting fear of doom and gloom into home owners that rates will go up, banks increase rates more than the RBA, the carbon tax, will the Govt go the distance, what are fuel prices doing, you need a personal loan to buy a banana and I could go on. Until certainty returns I’m afraid not much will change and our economy will continue to slide. Confidence needs to replace pessimism and that confidence needs to come in the reporting of how well things are rather than how bad. When they report 25% of economists predict a rate increase, why not report 75% predict they will stay the same or fall. 9.8% unemployment in the USA, why not 90.2% employment!
I work for a church and just yesterday I received an email from our electricity broker informing us our annual power bill will increase by $7,750 next year and $8,500 in 2015 because of the carbon tax, based on the Govt’s released figures. Stuff like that doesn’t encourage spending but rather what we’re seeing at present, put money away because it’s going to be needed. I think we won’t see any increases for some time and I agree with Steve, if there is a move it will be down because the RBA overcooked the increases and caused a massive slow down. Take the resources sector out of our economy and we’re a basket case like most of the rest of the developed world, but then where we have uncertainty we also have opportunity and I’m grateful for that.I like the odds of talking my wife into letting me buy a new bike with the exchange rate!!
But for the struggling retailers out there, I wouldn't dare spend outside the country!!
This topic has made for some great reading
Regards
JadeHeard a comment on the ABC this morning that the IMF is now telling the RB to raise interest rates! It's a real worry when the IMF starts telling one of the worlds most stable economies what to do! Think I'll switch to Gold….
Lets put a little bit of realism on this whole interest rate scenario.
The inflation rate well and truly exceeds anything put out by the reserve bank in recent years. I dont know why they bother even to stick it out there in the wind. Maybe people are impressed by flagrantly dishonest numbers representing an economies true level of growth and performance.
The end result of all this is people sink their money into solid long term assets (housing) and borrow to the hilt to support their habit. The costs spiral around them as REAL inflation takes hold and their leftover cash grows ever smaller. It literally means that the Reserve Bank .. by adjusting figures to suit a sold market climate, is in effect impoverishing their population by allowing real inflation to eat into their monetary worth.
We had a large cash injection in this country too .. a 'stimulus' to get things going. Its been spent. And money doesnt come off trees. We havent adjusted our economy to reflect a large move such as its been. Its a recipie for disaster. Inflation WILL take hold .. and money will change. I'd be expecting anything from mega inflation 18%+ … all the way to HEAVY inflation .. could be up to 33%. For anyone who fixed their interest rates .. they'll be set. Reduce your debt exposure NOW and lock down for a period of higher inflation. You'll do well .. and be sitting pretty out the other side.
That is some good advice xdrew and I agree with your take on inflation.
It may be rising inflation that led to so much housing debt, as you suggest. It's such a chicken and egg thing though. Does credit expansion lead to inflation or is inflation a result of credit expansion? Or, do they just feed off each other in 'good times'?
I think that housing purchase costs aren't included in general inflation/CPI calculations – although I think rental costs are. Correct me if I am wrong. But this would back up your POV that official inflation stats don't show the whole picture.
So you don't see any way of avoiding some kind of hyperinflationary environment now? Like you say, best course of action for individuals is to batton down the hatches and get used to a bit of frugality. If confidence is promoted in spending (as QLD is trying to do at the moment) it could make things worse, wouldn't you agree?
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