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 LATEST FROM THE KOUK

Get ready for a cash rate cut in April

Mon, 25 Mar 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/get-ready-cash-rate-cut-april-193244245.html

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Get ready for a cash rate cut in April

The data is in and it is compelling.

The Australian economy is faltering and the risk is that it will weaken further if nothing is done to address this decline.Not only has there been recent confirmation of a per capita GDP recession – that is, on a per person basis the economy has been shrinking for two straight quarters – but inflation is embedded below 2 per cent, wages growth is floundering just above 2 per cent, house prices are dropping at 1 per cent per month and dwelling construction is in free fall.

Add to this cocktail of economic woe an unambiguous slide in global economic conditions, general pessimism for both consumers and business alike and a worrying slide in the number of job advertisements all of which spells economic trouble.Blind Freddie can see that there is an urgent need for some policy action. And the sooner the better.For the Reserve Bank of Australia, there is no need to wait for yet more information on the economy.

It has been hopelessly wrong in its judgment about the economy over the past year, always expecting a growth pick up “soon”. Instead, GDP has all but stalled meaning that inflation, which is already well below the RBA’s target, is likely to fall further.In short, no. It is not like a 25 basis point interest rate cut on 2 April and another 25 in, say, May or June will reignite inflation and pump air into a house price bubble.

Such a claim would be laughable if there are any commentators left suggesting this.

Is the Aussie economy slowdown good or bad news for you?

Mon, 04 Mar 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/aussie-economy-slowdown-good-bad-news-015353581.html 

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Is the Aussie economy slowdown good or bad news for you?

Your economic well-being is undergoing some significant changes at the moment. Whether that is good or bad news depends on your home ownership status and intentions to buy, and the amount of money you have in invested in shares either directly or indirectly in your superannuation fund.

To the stock market first

Having been beaten down late last year, the Australian stock market has staged a powerful pick up. Compared with the low point in December, the ASX200 has risen over 12 per cent in two months. This is, quite clearly, great news for your superannuation balance and for your wealth if you own any shares directly.

The change in sentiment about interest rates and a solid profit reporting season has underpinned this jump in share prices and with US and local interest rates set to remain low or be lowered in the months ahead, share prices should continue to do well.

Falling house prices met with dismay and joy

From the perspective of personal finances, the news on falling house prices has been greeted with both dismay and joy. Home owners in Sydney Melbourne, Perth and Darwin and reeling under the weight of wealth destruction with prices down by between 10 and 25 per cent.

In Sydney, for example, that house that was valued at $1 million back in the middle of 2017 is now worth around $870,000, a drop of $130,000 in less than two years.

Ouch!