This is the main driver for a cash rate CUT, and it'll happen soon

Wed, 13 Feb 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/main-driver-cash-rate-cut-itll-happen-soon-200635247.html 

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This is the main driver for a cash rate CUT, and it'll happen soon

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.

While the RBA is yet to act on this fresh news, with official interest rates having been held steady at 1.5 per cent for the past two and a half years, the change in financial market pricing has seen the Australian dollar fall and the stock market register strong gains.

This is how it should be.

A large part of the interest rate cut scenario and how it would work to improve the Australian economy is via a lower Australian dollar exchange rate. While changes the Aussie dollar are driven by a lot more than interest rates, they can have a sizable impact on investors flows at least in the short term. The lower dollar, if sustained, will work to boost the competitiveness of exporters and those local firms competing with importers. As such, the contribution to bottom line GDP and jobs will be helped in a lower interest rate environment by stronger external trade.

The rise in the stock market is good news for investors as it is providing a partial offset to the slump in wealth coming from the decline in house prices. It could also be reflecting the market’s confidence of rising profits, an improved cash flow and a lift in private sector business investment that will flow if the RBA cuts interest rates.

Any interest rate cut from the RBA would also help the cash flow of all borrowers, be they in the business sector or householders. This cash would either be used to pay down debt or boost spending, both of which help the profitability of the business sector.

The timing of interest rate cuts remains unclear. After all, the RBA which has for the past year stubbornly expected interest rates to rise, has only just started to soften its view.

Recent comments from RBA Governor Philip Lowe suggested that the health of the labour market and changes in the unemployment rate, in particular, will determine any change in interest rates.

On that score, the unemployment rate has been trending lower in recent times, although it remains well above the level prevailing around much of the industrialised world and indeed, at the level prevailing before the global financial crisis hit.
Suffice to say once the weakness in the economy start to drive the unemployment rate higher, the RBA will lower interest rates. In the mean time, the adjustment has already begun with the Aussie dollar weaker and the stock market stronger as the market starts to factor in lower interest rates, at some stage, through the course of 2019.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.