In a surprise move today, the Reserve Bank of Australia has decided to keep interest rates on hold for February. The ASX Target Rate Tracker had the chance of the official cash rate being decreased to 4.00 percent, at 100% yesterday. Even I was 100% certain rates would be cut today.
Yesterday, the Australian Bureau of Statistics (ABS) released data showing retail turnover in Australia continues to decline, even in December during the lead up to Christmas. Seasonally adjusted, retail turnover fell 0.1% in December with growth levels now at levels not seen since 1984. This isn’t a surprise to us, considering household net savings ratios are at levels not seen in 25 years as households continue to control the purse strings and concentrate on paying down household debt.
On Friday, Roy Morgan Research released data showing unemployment was up 1.7 percent in January to 10.3 percent. According to the research, it is the highest unemployment rate in a decade – since January 2002 when the unemployment rate sat at 10.9 percent. Roy Morgan’s unemployment data normally tracks the ABS data, just a little higher, but in recent months has started to deviate away from official ABS data.
Even if rates were cut today, it is unclear if the banks would have passed any of the cut on to mortgage holders. However, rest assured, deposit rates would have been cut. The big winners from today hold in rates is self funded retirees and other individuals with exposure to cash products. They can continue to spend as normal, without having to make any cutbacks, something often missed by the cries of the media.
On the flip side, the Aussie has surged today reaching $1.08 and a six month high against the greenback. This is likely to put further pressure on manufacturers, retailers and the tourism industry already suffering from the effects of dutch disease.
In the statement from the RBA on the monetary policy decision, it indicated the “acute financial pressures on banks in Europe were alleviated considerably late in 2011” and while much still remains to be done, some progress has been made forward.
The central bank notes while unemployment has started to trend up in 2011, it has been “steady over recent months.”
Also steady or “stabilising” is the central bank’s view of residential housing after house prices had declined for “most” (not all) of the year. There has been a lot of debate in recent years about the central banks roles in asset bubbles, suggesting central banks should in fact be addressing the problem of bubbles and not sweeping them under the carpet. As residential property is a confidence game and with comments from the industry that we have hit bottom, maybe, just maybe, the RBA has err’ed on the side of caution and decided not to re-inflate the bubble by dropping interest rate at a time when everyone is still so confident Australia doesn’t have a debt fueled housing bubble. We can only dream!
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, Tuesday 7th of February 2012.
» Retail turnover falls 0.1% in December 2011 – The Australian Bureau of Statistics, 6th February 2012.
» 2.21 million Australians unemployed or underemployed – Highest ever record. Unemployment at 10.3% – Roy Morgan Research, Friday 3rd February 2012
The RBA has no where to go. UBS securities says banks are losing money on recent mortgages due to high wholesale funding. Put any downwards presure on rates and the banks will probably stop lending. Then we will have a home grown credit crisis on our hands!
Now let’s watch one of the banks default on their loans.
@Tom I agree with everything you said but I also think its a bit of arrogance as well. The RBA and Aussie govt must really think that the Aussie economy and businesses are in great shape. I think its going to have to take the housing market really gto drop in prices etc and for the jobless rate to really tick up before they do another cut. I think they should have cut but they may have one or 2 more months to asses everything. There is no doubt that rates need to come down especially with the AUD being so high. Its funny now how everyone is saying the AUD needs to be brought down with the exception of the Govt. I am reading all over blogs now the Aussie people saying its got to come back down. Use to it was all praise but now people are starting to realize the AUD is to high and is actually bad for a lot of industries there. Watch the massive job layoffs coming.
Sorry folks, but I want interest rates to continue to go up…. and yes I have a mortgage.
There is no way I’d support a cut, the only way to clean the slate and fix things is to wipe out all those who are to ignorantly indebted. Again sorry, I offer no bleeding heart for the “little aussie battler”, who is ignorant and indulges in a “bail me out if I do something stupid” attitude.
Already this morning the media has started taunting the banks…. the media are like little children in a playground of idiocy.
@LBS lowering interest rates will not stimulate industry. Industry has changed forever, change is here, only the unions, politicians, and the little aussie battler are the ones who can’t accept that. Soon we will not make cars here either, this has been a fact coming now for well over 20 years, but morons act like its only happened yesterday…..that’s change for you.
If the AUD drops too much though it will make petrol prices skyrocket. Not everyone can afford an electric car.
The best thing that could happen is banks independently raise their interest rates, causing turmoil in the banking sector in Australia, and with it bringing down the housing bubble overnight, ala as in the USA. And by best I mean worst.
What needs to happen is wishful thinking at best.
Reality is the RBA move only continues the plight for retail, tourism manufacturing sectors and also continues the downward trend for house prices. Perfect policy which is designed to crash the economy by wealth destruction.
At least cashed up investors dont get a pay cut this month.
Imagine if people took their money out of the banks and accquired real money like gold and silver coins/bars from bullion dealers. Then there would be a funding crisis in the banks, bank runs etc.
One little alien can only dream I guess.
How about the 13/14 economists surveyed that got it wrong yesterday. Why listen to them? consistently wrong.
Any chance that any of the big 4 will nudge rates up just a little bit? I just have this gut feeling they, or at least one of them may (really badly) want too.
Not everyone wants interest rates to drop. People who have cash in the bank are seeing their return from interest being constantly eroded. The banks are using the cash deposited to make loans. Essentially people WITH cash in the bank are supporting the people who have massive home loans. Low interest rates will simply encourage more idiots to take on larger loans, just as it did in the USA, and we all know what happened there, a massive property boom followed by a massive bust. History shows interest rates in Australia should be around 8-9%.
RBA are ment to keep inflation between 2-3% but also maintain employment. If the government curb there spending by 10% the RBA might have room to lower interest rates. Like that will happen under a labour government they don’t know how to stop spending. As for the AUD to get it lower we would have to turn the printing press on faster then in US and Europe. It might be best for the RBA and Government to just sit on there hands like they are now.
By historical standards rates are already low but debt is at record highs. Too many people borrowed too much money in the good times and were encouraged to do so by Governments and Banks over the last 20years. The finger pointing has just begun.
I do not think I have ever seen so much jaw boning going on among media columnists and politicians coming up to this RBA meeting, and then have the RBA not actyally yield. Amazing.
The economy is just as soft now as it was from the middle of last year, but unlike back then, house prices are really starting to drop and the panic is setting in, hence the clarion calls for a rate drop.
Wayne Swan already had his arguments set to go, declaring the banks must drop rates to match the RBA, and was taken by suprise, having to backpedal and then spin the RBS decision as a confidence vote in the economy.
As Rocket says, interest rates are at historic lows. Yet every newspaper in the country has just run an article of some poor family struggling to make their mortgage payment because of these ‘high’ rates.
Every Newspaper wants to keep their biggest customer happy.