Interest Rate Change

04/06/2019

June 2019 (Rate Decision & Analysis)

For the first time since August 2016, The RBA dropped official interest rates by 0.25% at its meeting today.

In the end this was not a surprise to many, with the market pricing in the strong prospect of the a 0.25% (25 basis points) cut to the official cash rate.

The discussion has been centred around muted growth and business investment, household consumption and inflation numbers. More broadly, as we outline in Money Markets below, the official cash rate is now more relevant as market interest rates have already fallen down around them in anticipation.

This was against a post election burst in positive energy reflected in a stronger share market.

Now the fun begins as we see how banks will react.  Mortgage holders may have to temper their expectations, as we do not expect that lenders (ones that are competitive currently at least) to pass on the full amount of the cut.

Alternatively, many lenders have led with fixed interest rate offers as the lever for sharper rates.  In a low interest rate environment, this may be a trend that continues in the medium term much like overseas.

Money Markets

The yield curve in Australia was technically inverted as the table shows. However, we have had to create history to drive that – with the 180 Day Market Rate at it lowest ever point in recorded history.

DateCash Rate180 Day Rate10 Year Bond
Aug 20161.50%1.79%1.82%
Aug 20171.50%1.69%2.66%
Aug 20181.50%1.99%2.74%
Sept 20181.50%1.97%2.54%
Oct 20181.50%1.92%2.69%
Nov 20181.50%1.93%2.65%
Dec 20181.50%1.94%2.60%
Feb 20191.50%1.99%2.24%
Mar 20191.50%1.89%2.10%
Apr 20191.50%1.79%1.78%
May 20191.50%1.56%1.79%
Jun 20191.25%1.38%1.54%

It did get me looking at the history books which took me to a time in 1974 when the short term was actually over 21%.

The current rates are almost unimaginable if you, like me, studied any traditional economic theory. If a futurist had told me we would have rates at this level in 2019, I would have imagined an unprecedented level of economic carnage.

The risk to our economy moving forward is that we do not have the lever of monetary policy. This was a fear always shared by the traditional economists but there has been a chorus of support from many business leaders too.

We are at an interesting in the financial cycle. The graph below (Courtesy ANZ Research) shows the gap between the Cash Rate and the 10 Year Bond Rate over the last 30 years. The 10 Year Bond is now at the lowest level in history. Traditionally, this would suggest that the outlook for the economy is negative.

There is certainly precedent for this as we look back in history, though I am not convinced this time. The paradigm for interest rate policy is different worldwide, with central banks much more proactive in using monetary policy as a tool to manage economic health.

We must also consider the debt bubble fear, with many countries feeling that they cannot increase interest rates at present regardless of the other economic variables.

Currency

A big reason that gives the RBA to lead such low rates is the relative health of the Australian dollar. The dollar’s strength is supported by the robust commodity prices and our rapidly falling current account deficit. This narrow deficit means that we are less exposed to the traditional currency weakness that is associated with low interest rates.

In other words, we are almost able to fund ourselves.

Property

Property is out of the political spotlight (amazing how fast we move on) and anecdotally the sentiment is up. The last month’s worth of data below obviously include pre-election figures – so the following month will provide some insights.

A guide of post election activity is via the latest auction clearance rates. The last week saw Melbourne continue to be above 60%, whilst Sydney clearance rates broke the 60% mark for the first time in a long time.

The updated Corelogic data shows a slowing correction.

Index Results May 31 2019.PNG

With some early signs of confidence returning – it is timely to look at more Corelogic data to put a marker of longer term trends.

 

Dwelling values have fallen by 8.2% from their peak, and the stark results in Perth, Darwin and parts of Regional Queensland are important reminders that property can be volatile.

We have commented previously about the lag rise in many Regional areas, but it is also worth reflecting that over a five (5) year period they haven’t out-performed capital cities.

The next three months of so of data across the entire economy will be worth a look.