It should come as no surprise that the RBA has again decided at today’s board meeting to leave the cash rate unchanged at 1.5%.
I feel a bit like a broken record, as for the last few months we have been saying that the economic environment we find ourselves in is more heavily weighted to the downside, not the upside.
That is, if rates are going to move in the near term, it is our opinion that the next most likely rate movement by the RBA would be down, not up.
High debt levels, low core inflation, benign GDP numbers (expect the 3rd qtr. figures to be quite low), low wages growth, an employment market with plenty of spare capacity, and a stubbornly high AUD all make it near impossible for the RBA to start lifting rates any time soon.
Of course the challenge with these sustained ultra-low interest rate environments is the appreciation of assets, most noticeably property prices in Sydney and to a lesser extent Melbourne. This will continue as yield hunters, unable to achieve sufficient returns from historically “safe” investments like bank term investments or government bonds, chase higher returns elsewhere.
Using the long term as a guide, the current Price-Earnings Ratio for many of the world’s equity markets appear to be overvalued. And given that asset prices around the world may be stretching their underlying fair value, what is the savvy investor to do next?
Are you, like us, unwilling to simply adopt a buy-and-hold strategy at these sort of asset prices? Are you concerned about the potential future volatility or downside risk of serious corrections in the share market, or property markets generally? But you can’t stomach the thought of decades of low returns any longer?
Then jump onto our upcoming complimentary online training where we will look at Property Development, asking whether now is the time to consider creating the returns you want to achieve in the market place.
If you’re curious, here’s the full statement made by the Board:
“The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices are generally higher than they were a year ago, providing a boost to Australia’s national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases.
Headline inflation rates in most countries have moved higher over the past year, partly reflecting the higher commodity prices. Core inflation remains low, as do long-term bond yields. Further increases in US interest rates are expected over the year ahead and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.
Domestically, the transition to lower levels of mining investment following the mining investment boom is almost complete. Business conditions have improved and capacity utilisation has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment. Year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures. Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.
Indicators of the labour market remain mixed. Employment growth has been stronger over recent months, although growth in total hours worked remains weak. The various forward-looking indicators point to continued growth in employment over the period ahead. Wage growth remains low and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens. Slow growth in real wages is restraining growth in household consumption.
The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.
Conditions in the housing market vary considerably around the country. Prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders have also announced increases in mortgage rates, particularly those paid by investors and on interest-only loans.
Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”