The Experts

Glenn Baker
Rates Expert
+ About Glenn Baker
About Glenn Baker

Glenn Baker joined ING Direct in 1994 and has more than 40 years of experience in the banking and finance industry. Prior to joining ING Direct, Glenn worked in local foreign bank subsidiaries and merchant banks, those being Natwest, Bank of Tokyo, and Rothschild. He commenced his banking and finance career at the Commonwealth Bank in 1968.

Following an initial period working in general banking Glenn has since specialised for more than 30 years in the areas of Treasury, Financial Markets Dealing, Asset and Liability Management and Investment. Glenn was directly involved in the establishment of ING Direct in Australia and had previously played a lead role in setting up Bank of Tokyo and Natwest subsidiaries following the initial granting of foreign bank licences in Australia.

More recently, Glenn has been engaged in the Finance function leading to his appointment as Chief Financial Officer in early 2011. In this role, Glenn has management responsibility for Financial Control and Treasury. He chairs the Asset and Liability Management Committee and Pricing Committee and is a member of the Bank’s Executive Committee and Management Committee.

Glenn is a Fellow of the Australian Certified Practicing Accountants and has a Bachelor Degree in Accounting and Financial Management.


Reasons for the December rate cut

Wednesday, December 05, 2012

ING DIRECT has announced it will decrease its variable mortgage rates by 0.25 per cent.

What were the main reasons behind the RBA's rate decision today?

The RBA didn’t point to any specific drivers for the decision. If anything they expressed expectation that earlier actions were still working their way through the economy and would have a positive effect. This move looks like a little bit more insurance to help foster sustainable growth.

Do we need to see more rate cuts over the next year to improve business and consumer confidence?

There has been a significant amount of monetary stimulus injected into the economy since November 2011 by way of rate cuts now totalling 1.75 per cent. The RBA can be expected to be watchful for a while, but if confidence and economic activity do not lift it is possible that further rate cuts could occur. The RBA comments however imply we could be near the end of this easing cycle.

Will the banks pass on this cut? Why or why not?

Individual banks will assess their position relative to their cost of funds and lending margins. Recent reductions in the costs of new deposits and wholesale borrowings are starting to reduce the funding cost pressures. Whilst the funding cost issue is far from resolved it is likely that more of the rate cut could be passed through to borrowers on this occasion.

What effect will today's rate decision have on the Australian dollar?

The rate cut has initially had negligible impact on the currency. The easing was largely expected and priced into the exchange rate.

What is your outlook for the economy?

The economy was softening on a number of fronts but it is basically on a fairly solid growth footing. This additional cut in rates should add a bit more confidence and as the RBA suggests help sustain further growth.


Reasons for the October rate cut

Wednesday, October 03, 2012

The Reserve Bank reduced the official cash rate by 0.25 per cent to 3.25 per cent following the 2 October Board meeting. The rate was last changed in June. This move had been widely anticipated although there were many market participants who felt the change might be made in November instead. To that end there had been almost universal acceptance that the cash rate would be reduced again, at least by 0.25 per cent, during the balance of 2012.
A number of factors both international and domestic were behind the decision.
The outlook for global growth has softened in recent months. In particular, economic activity in Europe has been contracting with unemployment still rising. Some countries, such as Greece and Spain, are struggling with slowing economies and high unemployment with no ability to stimulate activity due to the need to implement debt reduction and fiscal adjustment (austerity) measures. The European Central Bank has indicated its support for the Euro and European sovereign debt, through bond buying commitments. This has assisted in stabilising financial markets which helps remove a measure of instability and concern. The reality is that it will take some time for economic activity to turn around. The U.S. economy continues to experience modest growth with data releases generally presenting a mixed view of the economy. Growth in China has slowed appreciably in recent months, albeit that China is still presenting solid growth levels. The concern is that China, at lower growth rates, can no longer offset the weakness elsewhere. So on balance there is a generally sluggish world economy which has manifested itself more overtly over recent months despite hopes to the contrary.
Against this backdrop key commodity prices, particularly those pertinent to Australia's export performance such as coal and iron ore, have fallen over recent months and remained lower despite some recovery in recent weeks. Accordingly, Australia's terms of trade are lower, albeit still strong in historical terms. This development, though, has taken the edge off the strong growth performance of Australia through the mining export boom and created an environment in which the need for a more balanced growth scenario, across a wider range of sectors, is materialising.
In terms of the local economy, there has been developing weakness in key sectors. Retail sales have been largely flat apart from periods of temporary strength stimulated by government payments. Retailers, as a group, have been strident in calling for interest rate reductions for some time. This sector has been hard hit by the general preference of consumers to pay down debt and save.

Business closures and job losses, including those identified in recent State Government announcements, have received significant publicity and this in turn has had a negative effect on consumer confidence. Housing has also been sluggish. The general mood of consumers for improved personal finances has also limited preparedness to invest in housing both in terms of buying a home or investing in a property. This has limited construction activity which has had negative flow on effects to other parts of the economy.
The high Australian dollar, which has remained high despite the commodity price falls, has also continued to depress some sectors of the economy, principally those involved in import competing industries, and has also 'limited' export revenues at a time when export prices are falling in US dollar terms. The domestic tourism market continues to suffer from the high level of the currency as it is more expensive for foreign travellers to come to Australia and on the other hand beneficial for Australians to head to Europe or America.
Summing up these factors, a weakening global economy, a softer mining export sector, a strong currency, sluggish domestic activity in retail and housing and a need to lift confidence, were collectively good reasons for the Reserve Bank to introduce some more stimulus via easier monetary policy. The capacity to do so, due to the continuation of a low inflation outlook, had already been established and the Reserve Bank had indicated that it would be prepared to act if deemed necessary. The weight of evidence had become significant, to the point where inaction by the Reserve Bank could have led to greater negativity. The move this month will have some positive affect on confidence which should lead to increased activity over time.
Where to from here?
There is a school of thought the Reserve Bank will undertake additional easing action in November, that one rate cut of 0.25 per cent on its own will not be sufficient and indeed that there is rarely a 'one-off' move. There is also the prospect that the full amount of the official rate cut will not be passed on to borrowers which would lessen the effectiveness of the easing, although any 'retention' by banks is expected to be more limited now as funding cost pressures have recently shown signs of mitigating. It should, however, be noted that the Reserve Bank has indicated that policy is already at an accommodative setting with borrowing rates below their medium term averages. In this context and given the other Reserve Bank observation that earlier rate easings are still working their way through the economy, it is quite possible the Reserve Bank will hold off on any further action over the next few months. In the absence of any severe deterioration in global or local economic data in the near term, the first Reserve Bank meeting for the year in February 2013, presents as an appropriate time for further policy assessment.


Economic update: third month RBA leaves cash rate unchanged

Thursday, September 06, 2012

The Reserve Bank maintained stable monetary policy for the third month leaving the official cash rate unchanged at 3.5 per cent following the September Board meeting. This outcome was broadly in line with market expectations.
There is, however, a stronger view developing in the market that the Reserve Bank will need to ease the benchmark interest rate again over coming months.
What is driving that view and, if there is a case building for further monetary policy easing, why didn't the Reserve Bank act this month?
With respect to this month's decision to hold current policy settings, as was the case last month, it is probably based on the absence of any immediate urgency with respect to a need to act. Over recent months the Reserve Bank has been taking a 'glass half full' view of the Australian economy. Whilst it has been recognising the potential downside risks to future growth, mainly emanating from ongoing European debt concerns and the flow-on effects on the global economy, the Reserve Bank has adopted a monitoring stance. In particular, it has acknowledged that given the low level of underlying inflation in the local economy there is capacity to act in the event of need. The need has until now been characterised by a significant deterioration in the European debt crisis. Without this need, the Reserve Bank has been content to observe developments. In this context also, the Reserve Bank has indicated that significant monetary stimulus had been generated through a series of interest rate cuts (that lowered the official cash rate by 1.25 per cent over the period since November 2011) and that borrowing rates were generally below average, therefore being on an 'accommodative' footing.
In recent weeks, however, data releases have been painting a less buoyant picture and the Reserve Bank has begun shifting its language concerning developments in the global and local economy.
Firstly, the Reserve Bank is now observing a general weakening in global growth, with increased risk to the downside, following a more upbeat start to 2012. In particular, it has observed that activity in Europe is contracting and that the U.S. continues to struggle to generate anything better than modest growth numbers.

Closer to home, growth in China and Asia more generally has also softened in response to the generally weaker performance of the major economies that has lowered demand for exports. These developments have fed directly into the outlook for Australia. Commodity prices have fallen, particularly with respect to iron ore and coal which have been major components of our export driven economy. Australia's terms of trade, whilst still high by historic measures, have fallen from their peak of approximately a year ago and this shift is placing increased doubts around the ability of the mining boom to be sustained and to continue to drive the overall level of growth in the local economy. In this context, we have seen a number of mining projects either stopped or deferred which has generally fed this questioning about the sustainability (or more specifically the depth and longevity) of the mining boom.
With respect to the financial markets, the concerns over Europe and global market conditions have moderated somewhat due to repeating utterings by central bank officials in both Europe and the U.S. that action would be taken in the event of need to stabilise the Euro and to inject liquidity into markets to support and stimulate the economies. The statements have created a calmer market environment but there is a high expectation building that action, such as more bond purchasing by central banks, will be taken shortly to counter flagging growth. Should this not occur in the near term it is highly likely that market instability will return. This would place additional risk on economic growth.
Turning to local factors, the recent retail sales figures were much weaker than expected and again raised questions about the robustness of consumption spending, albeit that it had demonstrated reasonable strength over the earlier part of 2012. The assistance packages provided by the government around June appear to have boosted sales for a period but this effect has now dissipated and consumers appear to be returning to a more cautious behaviour. Whilst official employment numbers continue to point to modest growth in employment and a relatively stable unemployment rate (around 5.2 per cent) there are repeated examples of job losses across a variety of industries receiving publicity.

This serves to keep consumer confidence subdued as people continue to observe negatives in the economy and opt to defer spending decisions. On the positive side, the Reserve Bank points to the fact that business credit has picked up over the course of this year and more recently dwelling prices have 'firmed a little'.

The overriding view, however, remains one of uncertainty, whether it be the product of ongoing global weakness and market instability or concerns about the future of Australian economic growth and job security. In addition, the strength of the Australian dollar continues to inhibit economic performance. It has softened export revenues (on top of lower commodity price effects) and continues to negatively impact import competing industries. Whilst the Reserve bank is unlikely to intervene in markets to bring about a fall in the value of the currency, interest rate settings at current levels are certainly helping to hold up its value. In the event that the Reserve Bank finds it necessary to lower interest rates in the months ahead, a positive by-product of such action is likely to be a lower Australian dollar. 
So, whilst Australia is currently seen as maintaining a growth rate close to trend, the outlook is most likely for the various factors noted to contribute to a weakening in activity over months ahead. As observed risks are clearly biased to the downside. In this scenario the question is more about the timing of the Reserve Bank's next move on interest rates rather than whether or not it will act to reduce the official cash rate again. Future meetings of the Reserve Bank Board should be viewed as 'live' with respect to potential rate cuts. It is expected that the official cash rate will be reduced by a further 0.25% before the end of 2012, most likely in November. There could be further action in 2013 depending on developments with respect to global and local economic activity, although it is quite possible that the next reduction could see the end of this easing cycle with policy then stable for some time.


Economic update: RBA leaves cash rate unchanged

Friday, August 10, 2012

The Reserve Bank left the official cash rate unchanged at 3.5% for a second month following its August Board meeting. The decision was largely anticipated by the market.
In recent months, though, there had been considerable expectation that interest rates needed to be lowered further to stimulate the local economy, particularly given the re-emergence of sovereign and bank debt concerns in Europe and the negative flow on effect this has had on global economic growth forecasts. In addition, evidence of slowing activity in China, the driver of regional growth and a major contributor to Australian growth through purchases of our iron ore and coal, raised concern about future activity levels. Adding to calls for a policy easing was the high value of the Australian dollar which has been making things difficult for exporters and import competing businesses. Perversely, the decision to hold interest rates added further strength to the currency.
The release of the June quarter inflation data in late July gave a boost to the prospect of easier monetary policy. Underlying inflation fell further over the quarter to an annual reading at the bottom end of the RBA target range viz. close to 2%.
The combination of low inflation and resurgent global growth concerns certainly provided scope for the RBA to act to lower rates. So why didn't it?
The answer probably lies in two areas. Firstly, it may be a question of timing. Secondly, the case for action may not be as strong as first thought.
In relation to timing, the Reserve Bank did not see a compelling case to act immediately. Over the course of the last nine months the official cash rate has been eased by 1.25%, from 4.75% to 3.50%, the bulk of which occurred in May and June this year. With this level of stimulus already in place the Reserve Bank appears to have wanted to observe the effect of the current policy settings before adding any further interest rate support. Additionally, there is an argument that suggests that while European concerns have re-emerged there is not an immediate crisis to deal with. Preserving some 'firepower' in relation to the capacity to ease interest rates may well be a more prudent approach. So, today's decision could represent a pause in monetary policy easing. The benign inflation environment certainly gives the Reserve Bank lots of scope to act if required, if economic growth weakens considerably or if there is further financial market turmoil that threatens confidence and future growth expectations.
With respect to the case for easing, the evidence started shifting in recent weeks. Firstly, GDP data for Q1 2012 indicated that the economy was operated at an above trend rate. Whilst this data was for the first quarter of the year it had surprised on the upside and at least cautioned that the notion of a slowing economy might need to be evidenced through the next quarter's figures. Additionally, recent data has indicated that areas of prior weakness such as retail sales and housing have performed more strongly. In the case of retail sales it is evident that the cash payments being made to households by the Government as compensation for the expected impact of the recently introduced carbon price was fuelling increased consumption spending. It remains to be seen if this improvement in retail sales is only a short term boost generated by this cash injection or whether there is a more fundamental shift taking place. Retailers certainly fear that activity will slide over coming months and have been calling for further interest rate cuts to maintain momentum. Employment growth has slowed to a moderate level over the course of 2012 and the unemployment rate has stabilised at around 5.2%.

Publicity surrounding job shedding in some industries, notably retail and car manufacturing, has added to calls for further stimulus but in general labour market conditions have proven to be sufficiently resilient to not be an immediate factor in policy deliberations. The Reserve Bank pointed to a pick up business credit growth as another recent indicator of an improving economy. On balance there is insufficient evidence at present to suggest that the economy needs further - and more to the point - immediate stimulus. That is not to say that there won't be adverse developments over coming months but rather that the current picture indicates an economy that is in reasonably good shape.
In the accompanying statement to its rate decision announcement the Reserve Bank played down the significance of the current inflation readings. Instead it pointed to its medium term view that inflation would be 'consistent with the target over the next one or two years'. It added that maintaining low inflation over the longer term would require domestic cost rises to be contained as the positive effects of earlier exchange rate appreciations wane. This would be compounded by any fall in the value of the Australian dollar. So the Reserve Bank is not as focused on today's inflation levels as the market is and appears to be discounting this as a driver of policy in the short term.
It was also very pertinent that in communicating its current 'on hold' position the Reserve Bank also pointed to the fact that past decisions had brought the general level of interest rates for borrowers to 'a little below their medium term averages'. This added to the notion that the Reserve Bank wanted to observe the impact of the series of easings already undertaken and that it considered policy to be already in the 'accommodative' mode.
Summing up the situation it is clearly evident that the Reserve Bank's view of the economy is relatively upbeat. This contrasts somewhat with views in the market place particularly those expressed in some quarters such as retailers who are concerned about future sales prospects and industry in general, particularly those sectors battling with the strong currency - exporters and import competing companies. The Reserve Bank has the capacity to do more to lower rates but does not see any urgency, preferring to observe developments for the time being. In particular, it can respond to any adverse developments on the world stage such as a revival of European debt concerns and a deterioration in global growth that in turn lowers Australian activity levels.
So the Reserve Bank is well positioned to respond to any adverse developments but it is signalling that its current view of the economic outlook and its current interest rate settings do not require any further action at present. Looking ahead, while the Reserve Bank has effectively removed any indication of a policy bias it is more likely that the official cash rate could need to be reduced further (but modestly, by say only another 0.25%) before we see the end of the current cycle.



Economic update following the RBA's May decision on rates

Thursday, May 03, 2012

The Reserve Bank acted decisively following the 1 May Board meeting by reducing the official cash rate by 0.5% to 3.75%. The size of the cut was regarded as surprising by the market.

Expectations were high that the Reserve Bank would cut the rate by 0.25% especially given the comments made after the April Board meeting that indicated that if the first quarter inflation numbers (released in late April) remained low there was room to ease monetary policy if warranted. This was widely interpreted in the market that the central bank was close to lowering rates but just wanted to sight the latest inflation data before acting.

The step away from the usual 0.25% adjustment was not so widely anticipated. In hindsight though the decision makes sense.

There were two views of the likely outcome for May. Most economists and market participants felt that the Reserve Bank would move by 0.25% but there was a small group thinking they should do more. Many business leaders were urging for a larger move. The general concern about a larger move and the reason most commentators settled on a 0.25% drop was the potential for a larger cut to be seen as alarmist, sending a signal that the economy was in a poorer state than previously thought. This was seen as potentially a negative for sentiment; a further downward influence on the economy. After all, rates could be lowered by a series of moves and there was no obvious need to move more aggressively.

So why did the Reserve Bank move by 0.5%?

The answer lies in the shift in approach. The Reserve Bank has for some months now referred to the level of lending rates in the market (especially the very publicly sensitive home mortgage rate) as the key factor, not purely the level of the cash rate itself. The Reserve Bank has recognised that the nexus between the cash rate and lending rates has been broken due to the major shift in funding costs for banks that are no longer strongly correlated to the official rate.

Wholesale market funding costs have risen sharply over recent years and remained high, the result of concerns regarding banks emanating from the global financial crisis and the subsequent European debt crisis. Interest rates on deposits have risen sharply also and increased as a proportion of bank funding, a direct response to high wholesale market costs and attempts to reduce reliance on that source. Term deposits in particular have become an interest rate battleground with margins above the official cash rate moving significantly above historic averages. These changes in funding behaviours and costs have also been stimulated by regulatory change as banks are being encouraged to access more term funding and reduce short term funding exposure in order to build stronger, more liquid balance sheets which in turn would guard against any future market shocks.

Now, since the Reserve Bank last eased the cash rate in December, the costs of funds pressure on banks brought about increases in lending rates in the market during February. Further, in the lead up to the May meeting, market speculation that banks would need to repeat this adjustment and again raise lending rates, or not pass on the full amount of any potential Reserve Bank easing, was high. So in this context and with a strong predilection to target lending rates as opposed to the cash rate itself, the Reserve Bank saw a need to move the official cash rate by a larger amount. By doing this, and after taking into account the prospect of the cash rate change not being fully passed on to borrowers via lending rates, the net outcome would still produce a desired level of monetary stimulus to the economy.

The above discussion clarifies why the Reserve Bank moved by a larger than usual amount. Behind this though is the basic reason for moving at all, for creating stimulus. In its statement the Reserve Bank acknowledged that economic growth had been weaker than previously expected and the long awaited inflation April numbers showed that inflation had actually fallen. Forward forecasts were reduced for both economic growth and inflation, raising the case for action to stimulate the economy. Whilst no reference was made to it, there is also probably a background picture developing around a tight fiscal position, commencing with the coming Federal Budget which is expected to turn a large deficit into a surplus, that would produce subdued growth outcomes.

We should not forget that the global economy is still impacted adversely by the European circumstances. China has moved to a lower more sustainable growth rate. The U.S. is generally recovering but employment remains sluggish. So the general global setting remains uncertain and whilst on an improving track, is generally soft in terms of growth. This adds to the need to ensure that the local economy is not adversely affected by global challenges.

The other major factor to consider is the general level of confidence, particularly that of consumers. Spending has been conservative and saving and debt reduction have been predominant among households. In an environment of economic and political uncertainty consumers are also faced with rising costs for essential services such as electricity and are yet to see the impact of the forthcoming carbon tax. Confidence is therefore down and the propensity to spend was at risk of diminishing further. The interest rate adjustments should have a positive impact on sentiment and lift spending. In time there is also likely to be a positive flow on to the housing market through lower mortgage rates. This will also alleviate pressure on household budgets.

Where to from here?

The Reserve Bank has acted strongly to inject some stimulus into the economy. It can be expected to observe the impact of this move over coming months before taking any further action. It is quite possible, though, that this latest easing, whilst reasonably sizeable of itself, will not be sufficient to lift the economy significantly back toward a higher growth rate, particularly given the potentially adverse effect of tight fiscal policy and a limited flow on to lending rates. Given the low inflation climate we are in, there will be room to do more. A further cut in the official cash rate is higher likely in coming months.

Check out Glenn Baker's recent appearance on SWITZER TV.


Why a softening eurozone crisis meant no-go for rates

Thursday, March 08, 2012

The Reserve Bank maintained the official cash rate at 4.25 per cent per annum on Tuesday following the March Board meeting. This was consistent with market thinking and the general signal provided in February following its decision last month to hold the rate steady.

While the Reserve Bank started to lower the rate at the end of 2011 with 0.25 per cent cuts in both November and December, it has since signalled a 'steady as she goes' outlook and is unlikely to move the rate again for some months, unless of course there is a significant deterioration in the current outlook. The statement accompanying today's decision is very similar to the last one and clearly shows that the Bank is comfortable with the current monetary policy settings.

The reasoning behind the rate reductions in late 2011 was largely based on the persistent problems in Europe with sovereign debts concerns generating severely deteriorated financial market conditions which included dramatically higher funding costs for banks due to the significant flow on effects of sovereign debt concerns on the stability and financial performance of many European banks. The start of 2012 has seen a softening in the European crisis through the development of a rescue package for Greece to hopefully save it from defaulting on its debt, general fiscal consolidation measures and more recently additional support being made available to banks through low cost funding provided by the ECB.

The Reserve Bank had seen these European problems as potentially having an adverse effect on global growth which would ultimately lead to softness in Australia's own economic growth rate. At the same time, the Reserve Bank was already observing weakness in some sectors of the local economy, namely retail spending and housing in particular, and employment growth stalling after a long period of strong growth with an associated upturn in the unemployment rate. Consumer and business confidence had also fallen, largely on the back of the European and global market disruptions. Within this scenario, inflation (in underlying terms) was sitting comfortably toward the bottom of the Reserve Bank's target range of two to three per cent. This, in particular, in concert with the other weakening signals in the economy gave the Reserve Bank scope to ease rates to stimulate activity. While there were no immediate signs of an adverse impact on Australia from global factors, the Reserve Bank was effectively seeing sufficient potential for this and eased rates as a form of insurance at a time when it had the capacity to do so.

Another factor in easing policy was the strength of the Australian dollar which had constrained (and continues to constrain) activity in some sectors such as tourism, generally dampened revenues for exporting manufacturers and intensified competition for import competing businesses.

Whilst the 2011 rate moves did produce positive responses, the market expected a continuation of monetary policy easing would take place into 2012 to support the economy.

The Reserve Bank is now presenting a picture of Australia that does not, in its view, necessitate any further policy action.

Europe is no longer seen as being in a downward spiral. It is surely far from being 'out of the woods' but conditions there are seen as stabilising and financial markets are also more stable with funding conditions for banks on the improve. Further, data coming out of the U.S. indicates an improving economy with, importantly, employment starting to make steady gains. Additionally, Asian economies continue to produce sound growth led by India and China, albeit that growth rates are moderating from their previous high levels with China in particular focused on a slightly softer but more sustainable growth path. The global picture is now seen as more supportive of Australia than was potentially the case a few months ago. Having said this, there is still scope for a weaker global scenario to detract from the local growth outlook and this will remain a factor in assessing monetary policy settings going forward. For now things are looking brighter though.

Locally, inflation (in underlying terms) continues to remain benign with the more recent reading for Q4 2011, released in late January, reaffirming that underlying inflation remains in the middle of the target band. The Reserve Bank's published outlook is for an acceptable inflation position to persist for some time, in fact into 2014. At that time though underlying inflation is forecast to have moved toward the top of the Reserve Bank target band.

While some sectors remain relatively weak the mining boom, backed by high commodity prices and historically strong terms of trade, continues to see significant investment in mining and related activities. Flow-on effects from this investment are anticipated across the wider economy. The influence of the policy easing of 2011 is still working its way through the economy. In particular, consumer and business confidence are showing early signs of improvement, although this appears to have been halted by the cessation of the anticipated further policy easing along with the subsequent increase in lending rates by banks in response to higher funding costs, an outcome of 2011 conditions in global markets. The lower interest rates are expected to positively influence consumption and borrowing over time if conditions in global markets remain steady and concerns about a global crisis dissipate. The Reserve Bank's expectation is that growth in the economy, although varying across sectors, is returning to trend levels of around three per cent to 3.5 per cent. In this context it does not see a need to add any further stimulus.

As indicated, the Reserve Bank is comfortable with the current interest rate settings, particularly in terms of its view that rates for borrowers 'remain close to their medium term average'. It expects the economy to grow at a steady rate under current policy settings. It is still mindful of potential downside risks to growth should the situation in Europe deteriorate again. In this event it has the comfort of a low inflation environment and a cash rate at a level that allows plenty of room to move to create stimulus. It is a position that would be the envy of many a central bank.

No change is expected to the official cash rate for some months unless things turn sour in the near term. In the longer term (and that's probably a fair way off) as global conditions improve and economic growth builds there may be a need to raise rates again.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Global economy a major factor in February rates decision

Friday, February 10, 2012

Written by Michael Witts, Treasurer, ING DIRECT

At Tuesday’s meeting the RBA Board opted to keep rates unchanged.

The RBA cited a range of factors, primarily relating to the global economy in supporting their decision.

The RBA cut rates in both November and December, in response to the adverse global developments and further potential risks. Since then, the global economy and outlook has not deteriorated to the extent anticipated.

Indeed, financial markets have opened in an especially positive mindset this year, reversing the extreme risk adverse attitude from late 2011.

Progress has been painfully slow in Europe, although there does appear to have been progress made on the Greek debt position.

The US economy has continued to build on the initial signs of growth evident in late 2011.

China confirmed its economy grew at nine per cent in 2011.

These developments have been reflected in improving equity and commodity markets. The latter has recently broken a downward trend that had been in place for much of the second half of 2011.

It appears the mix of global growth in the period ahead will be driven by US and Asian growth as opposed to the European-Asian mix that has been apparent over the past several years.

Regardless of source, the bottom line for Australia is that global growth will continue, albeit, marginally weaker than previously expected. This will continue to underpin the high level of investment in resources and related sectors of the economy. 

Weak labour markets

The Bank noted the recent weakness in labour markets.

However, the labour market is a function of both short-term global uncertainty, but more importantly, the transformational changes that are flowing from the resources boom. Two factors are important here; increased labour demand from capital intensive sectors, and the impact of the higher exchange rate on import competing sectors (manufacturing). In addition, labour productivity has been trending lower over recent years.

While there has been anecdotal evidence on the state of the economy since the December rate cut, there has been little in the way of substantive new data. The main components of the December quarter national accounts will be released just prior to the March RBA meeting.

Confidence in the domestic economy is largely a function of offshore developments. If Europe continues not to deteriorate, and the US continues on its seeming growth path, the absence of negative front page news will gradually restore confidence.

The RBA indicated they stand ready and have the capacity to adjust interest rates should the global economy reverse its recent positive tone resulting in weakness in the domestic economy.

Impact for borrowers and savers

Borrowers continue to enjoy historically low-level mortgage rates – especially fixed rates. Despite the RBA leaving rates unchanged, mortgage rates will remain around these historic low levels.

The majority of borrowers usually do not adjust their monthly payments when interest rates are cut, rather they use the constant repayments to consolidate the buffers they have built up.

The increased cost of funds in wholesale markets has resulted in increased competition for domestic non-wholesale funds. Again these market conditions will be largely unchanged by RBA actions. Savers will therefore continue to hold the upper hand.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.


The Reserve Bank’s early Christmas present

Thursday, December 08, 2011

Written by Michael Witts, Treasurer, ING DIRECT

The RBA, at its recent meeting, provided an early Christmas present to the Australian economy.

For the second month in a row the Board adjusted the overnight cash target rate downward to 4.25 per cent, a decrease of 25 basis points. Further, the comments from the RBA Board left the door open for further cuts in the New Year.

Why has the previous staid RBA Board become so generous?

It is not so much what they have done versus what they foresee.

In previous months, the RBA has been sanguine that events in Europe will have limited, if any, impact on the Australian and Asian economies.

However, a reduction in the reserve requirements by the Chinese officials and the increased severity and ongoing complexity of the European mess has clearly shifted the RBA position.

While previously, the Bank was confident Australia and Asia could weather the storm from Europe; this has now changed.

The Bank noted, “investment in the resources sector is picking up very strongly, with much more to come (and) some related service sectors are enjoying better than average conditions. In other sectors, changed behaviour by households and the high exchange rate have had a noticeable dampening effect.”

The Bank suggests that the recent weakness in the labour market will temper wages growth in the period ahead, such that the lower inflation path will not be threatened by wages costs.

The combination of these two factors – the impact of Europe and the subdued inflation outlook – provided the confidence for the Bank to adjust the cash rate lower.

Reflecting the contagion effect from Europe, the Bank noted the ongoing challenging funding market conditions that Banks around the world are facing.

Indeed, it is noteworthy that none of the major banks immediately announced the extent to which the RBA cut to the cash rate will be passed through to the household mortgage sector. Previously these announcements have been made within minutes of the RBA announcements.

As evidenced by the RBA move, global economic and market developments are being driven by events within Europe.

It appears that Europe is approaching the final solution Mark 4 (or is that 5). It is easy to lose count.

On a positive note, it really does appear that Europe is getting close to the final solution.

The key point that has been absent from previous proposals is the concept of fiscal discipline with consequences. Although, within the existing budgetary arrangements the limits on government deficits were available, they were never enforced; at the ultimate cost of the broader European community and, as appears increasingly likely, the global community.

The most recent plan incorporates automatic penalties for breaches of budgetary discipline. In addition, compliance would be measured by an independent adjudicator. While this approach has been endorsed by Germany and France, broader endorsement and acceptance is subject to a meeting at the end of this week. Following this, a process of national endorsement would be required.

To ensure that the European politicians appreciate the implications of the task before them, the Standard and Poor’s rating agency announced that 17 eurozone countries were on credit watch for a potential downgrade subject to the outcome of the 8-9 December European leaders meetings. France has been identified for a potential two notch downgrade.

In the event that S+P did downgrade the various European sovereigns, the universe of AAA countries would be significantly depleted. Australia stands strong as one of the few AAA rated countries in the world.

Meanwhile in the US, despite the European distraction, economic data has been surprising to the positive side over the past two months. This suggests the US economy will enter 2012 well placed to consolidate on the strengthening economy evident over the final quarter of 2011.

Notwithstanding the improvement in the economy, the stalemate on the US budgetary position is likely to return to the front pages.

As in Europe, the budget issue must be solved; the question is how much damage to the real economy are politicians prepared to inflict on the basis of partisan rhetoric.

Outlook for interest rates into 2012

Clearly the outlook for Australian interest rates over the first half of 2012 is more heavily dependent upon European events than previously.

Despite previous solutions leaving the markets underwhelmed, there appears a realistic determination that the current proposal can deliver.

The implementation risk remains considerable.

Against this background, it appears likely the RBA has scope to provide further assistance to the domestic economy over the first half of next year. Additional cuts in rates will be designed to cushion the impact on the domestic economy of a further deterioration in Europe.

The next opportunity for the RBA to adjust rates will be at the February meeting when the RBA will have a further reading on inflation.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Decisions behind the RBA's rate cut

Wednesday, November 02, 2011

The Reserve Bank lowered the official cash rate by 0.25 per cent to 4.5 per cent per annum on Tuesday following the November Board meeting. This was the first change to monetary policy since it last raised rates in November last year.

The potential for this move was signalled last month when the Reserve Bank observed that 'an improved inflation outlook, if confirmed by further data, would increase the scope for monetary policy to provide some support to demand, should that prove necessary'.

The key influence was the release of the September quarter inflation data in the last week of October. This showed that inflation was indeed moderating with the underlying measures falling to the lower end of the target range of two per cent to three per cent. Further, the Reserve Bank is now forecasting that inflation will stay in its target band for some time to come.

Inflation was, however, only one element behind today's decision, albeit a highly important one.

As has been observed over recent months the ongoing unstable market conditions and the entrenched concerns about European sovereign debt levels and the flow on impact of revaluation losses on European banks has seen economic activity in Europe and the outlook for recovery weaken considerably.

This has led to a downgrading of global growth expectations. With the Asian growth engine, China, also moderating growth, this global slowdown has in turn seen the outlook for Australia brought into question.

At the heart of concern is a weakening in both consumer and business confidence. This results in a lack of preparedness to spend or invest. To lift economic activity, confidence firstly needs to be restored. The easing in the official cash rate will flow through to borrowing costs both for business and consumers, particularly home loan borrowers. This will have a positive effect on cash flow making more money available for spending.

Over and above the simple effect of increasing available spending power is the signal sent (and received), that the Reserve Bank is prepared to stimulate the economy if needed. This is a shift in emphasis from the position communicated earlier in the year, only a matter of a few months ago, that the next move in interest rates would be up to continue to stave off rising inflation. As a result this move will produce a healthy boost to confidence. So it is not so much about the size of the move as it is the direction - the shift in thinking at the Reserve Bank.

Going forward it is not possible to be definitive about the next move in monetary policy. On balance, the bias, if there is one, has probably shifted toward further easing. This would be the case at least until the European situation is resolved or at least the debt markets stabilise on the basis that a credible plan is in place to satisfactorily resolve the debt crisis.

Nonetheless, if the economy starts to grow at a faster rate and inflation begins to re-emerge, the Reserve Bank could reintroduce a tightening bias, going back to the positioning it held prior to the recent global turmoil.

It should not be overlooked that the Australian economy is still experiencing record terms of trade and a huge boost to national revenue from mining exports. This will continue and very large investments are going into building on the strength of this sector.

The weaker sectors such as retail spending and housing could well respond to the monetary stimulus, thus adding to the growth coming from the mining boom. In this scenario total economic growth would move back above trend levels.

An important determinant for the future is also employment. Whilst this has weakened a little in recent months with the unemployment rate rising above five per cent it is likely that strengthening growth would see unemployment fall again and wage pressures which are currently subdued possibly re-emerging. This could be the foundation for a different perspective on inflation than that currently held.

The Reserve Bank has responded to the needs of the economy and reduced the official interest rate to build confidence and stimulate growth at a time when inflation is looking subdued. The next move in policy could be in either direction, up or down. 

Any worsening of the European debt crisis could lead to further policy easing. Stabilisation of the European situation leading to an improved global growth outlook would feed into positive outcomes for Australia. In that scenario interest rates might need to be raised. The balance of probabilities seem to be pointed toward further relaxation of interest rates in the short term.


How the Reserve Bank will move next

Tuesday, October 11, 2011

The Reserve Bank's decision to hold the official cash rate steady at 4.75 per cent per annum following its early October Board meeting means that the rate has been held stable for at least a year, the rate having last been raised in November last year.

The outlook for the official cash rate is for a further period of stability.

There are a number of reasons for this expectation, which involve both global and domestic factors with the former having greater impact recently. The long-held view that interest rates would be raised over time has recently been challenged by the possibility that a global economic downturn would see rates need to be eased to support a stalling economy. On balance, a 'steady as she goes' approach is most likely.

The outlook for global economic growth has worsened considerably in recent weeks. The emergence of further global financial market uncertainty in early August has not abated and there continues to be significant concern regarding the flow-on effects of sovereign debt risks in Europe, principally emanating from major concerns regarding Greece and its potential to default on its debt.

Not only does the need for fiscal consolidation in many European countries negate the ability to stimulate economic activity but the potential impact on banks that hold sovereign paper, in terms of the need to write down the value of holdings, further exacerbates the situation as banks move to limit their lending. Confidence has fallen significantly and with high levels of unemployment the prospects for European growth look bleak. Monetary policy can do little as well given that interest rates are already low.

Across the Atlantic, the US also continues to struggle with low economic growth, high unemployment and similar difficulty in finding effective stimulation measures given its debt position and effectively zero interest rate setting. Global share markets have fallen significantly in the last two months and this has in turn added to weakened confidence through the perception of diminished wealth by people and businesses.

This global backdrop has heightened concerns in Australia. The sheer fact of such significant market instability and the perception of weaker global growth as well as diminished personal wealth has led to much weaker consumer and business confidence. This level of global uncertainty in itself gives the Reserve Bank cause to hold off on monetary policy tightening. The continuance of weaker domestic data adds to this scenario. In particular, retail sales have remained weak over recent months and the housing sector has also been sliding over time as evidenced by ongoing softness in both housing finance and building approvals.

Australians have also been adjusting to higher utility charges, which has reduced the amount of money available for discretionary spending. The preference to save or reduce debt is another factor. On top of everything else, there has been a recent weakening in the employment markets and this has also contributed to the cautious approach being adopted by consumers. China, India and Asia more generally continue to fuel our export-driven mining boom and while commodity prices have fallen somewhat in recent weeks, the terms of trade remain very strong and the economy is benefiting from strong growth in national income.

Unfortunately, this is now offset by broad weakness across the rest of the economy. The strength of the Australian dollar, although it has recently come off its highs, is also working against business, especially in industries such as tourism, manufacturing and education.

Only a few months ago when the June quarter inflation numbers were released in late July, there was a heightened expectation that the next interest rate increase was close. Unemployment was at a recent low and underlying inflation was showing signs of challenging the upper end of the Reserve Bank target band toward the end of 2011.

At that time also there was a higher expectation that the global recovery was underway. In that climate it was widely anticipated that interest rates would need to be raised again to slow down the economy and avoid the emergence of higher rates of inflation. Today, things look very different and there has been considerable speculation that the Reserve Bank would need to stimulate the economy through lower interest rates. This is unlikely in the short term as the Reserve Bank would not want to create policy stimulus unless it was seen as absolutely essential and certainly not if there was any prospect that it might need to be withdrawn in the short term.

The next inflation print in late October could well show the effect of softer economic growth through a weaker prices change but this of itself would not be enough to prompt a change in policy direction. Rather, the Reserve Bank will be looking for clear signs of the need for policy stimulus which would include both significantly lower inflation expectations and a much weaker employment climate.

The Reserve Bank continues to anticipate solid growth in Australia over the medium term with near-term growth being softer than previously expected. It has also acknowledged that an improved inflation outlook (should it evolve) would provide scope monetary policy support in the event of need.

At the moment, there does not appear to be a clear case for a policy shift in either direction. The most likely scenario over the months ahead is for the Reserve Bank to monitor developments in the global economy and financial markets and to further assess the data coming out of the Australian economy. Monetary policy is expected to remain on hold for a period that could eventually extend well into 2012.

A by-product of the current market conditions is that longer-term interest rates have fallen sharply. As a consequence, fixed rate home loans can be obtained at levels below variable rate loans. Not surprisingly this is stimulating demand for fixed rates.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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The RBA’s decision and the volatile economic environment

Wednesday, September 07, 2011

Written by Michael Witts, Treasurer, ING DIRECT

Extreme volatility has characterised global financial markets over the past month. The combination of the ongoing European Sovereign Debt crisis and the stand-off and last-minute resolution of the US budget deficit issue, which culminated in the downgrading of US government’s credit rating, contributed to the extreme volatility.

Domestic markets have lurched from anticipating significant rate cuts to a more balanced view of near-term interest rate movements.

The balanced view was endorsed by the release of minutes from yesterday’s RBA meeting, which resulted in the cash rate being left at 4.75 per cent.

The accompanying statement highlights the dilemma facing the Bank.

Despite the Board remaining “concerned about the medium-term outlook for inflation, the uncertainty and financial market volatility has reduced business and consumer confidence which may result in more cautious behaviour of firms and households. The key question for the Board is the extent to which softer global and domestic growth will work, in due course, to contain inflation.”

The RBA does not suggest that they see reasons for a near-term easing in interest rates. Rather, the Bank suggests that a slowing in the economy, due largely to offshore events and the high level of the Australian dollar, will contribute to less inflationary pressures, thereby avoiding the need for interest rate increases.

This supports the argument for the cash rate to remain on hold for an extended period.

The question for policy makers will be judging the extent to which the recent financial markets volatility has impacted consumer and business confidence.

The impact will be reflected in retail sales and other measures of consumer spending over coming months.

Employment data will be a key indicator to assess the impact on the business outlook. Data on these indicators will be released over the next few months.

It is likely the RBA will be on hold until it has got a clearer read on the direction of the economy. This could be well into 2012.

The RBA is reluctant to ease prematurely, given the inflation risks, together with the strong performance of the resources and related sectors.

Key local measures of consumer and business confidence will be followed very closely over coming months.

International developments continue to have the capacity to derail the domestic economic outlook.

Progress on resolving the European issues have been painfully slow and largely ineffective over the northern summer. European leaders need to demonstrate to markets an acute appreciation of the steps required to correct the fiscal imbalances across the Union. Equally governments must demonstrate resolve to implement the hard decisions.

Markets are impatient of government inaction and are looking for swiftly implemented solutions. However, these solutions cannot usually be implemented to the market’s timetable. Hence there is likely to be disappointment in the markets, which translates to volatility.

Despite the neutral domestic interest rate outlook, renewed concerns in wholesale funding markets have seen continued strong interest from banks to raise deposits from the savings market. Term deposits rates remain very attractive relative to both current interbank market rates and those in prospect.

Borrowers continue to benefit from the stable RBA cash rate.

In addition, significantly lower longer-term interest rates have sparked interest in fixed rate mortgages. In many maturities, the longer-term rates are below the current variable by a considerable margin.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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RBA on hold until stability returns

Friday, August 05, 2011

Written by Michael Witts, Treasurer, ING DIRECT

At its meeting on Tuesday, the Reserve Bank of Australia left the cash rate unchanged at 4.75 per cent. The cash rate was last adjusted (an increase of 25 basis points) in November 2011.

The Bank cited increased global uncertainty, especially in Europe and the US, to support the case for rates to remain on hold. In contrast to recent meetings, where the RBA placed heavy emphasis on the resources and related sectors, the Bank appears to have placed greater importance on the slower sectors in the two-speed Australian economy.

The Bank further noted that the domestic economy was underperforming, compared to expectations, particularly; consumer spending and sentiment is in the doldrums. Major department stores and restaurants have been most affected by the reluctance of consumers to spend.

Consumers are being told Australia is experiencing a once-in-a-generation boost to income, yet at a personal level they are yet to see the benefits flow through. Equally, the weakness in housing prices conveys a negative wealth effect to consumers.

The Bank also noted that the strong AUD is impacting import competing industries. These domestic manufacturing industries are very exposed to the high value of the Australian dollar as it makes imports cheaper and erodes their margins and market share. Although those sectors related to resources are enjoying current market conditions, the balance of industries are suffering from the combination of weak domestic demand and cheaper imports.

The Bank had expected the recovery in production in flood-affected sectors (especially coal) to be faster than has occurred. Delays in the rebuilding of essential public infrastructures and mine specific works have contributed to these delays.

Against the background of a generally weak domestic economy, the RBA Board reiterated its concern about the medium term inflation outlook, however, judged that the current setting of monetary policy was delivering the appropriate level of restraint. Reflecting the subdued level of activity in most sectors of the economy, credit growth has slowed. In addition, various sectors of the economy, especially the household sector are rebuilding their balance sheets, as clearly evidenced through the higher savings ratio. The combination of these factors is reflected in asset price growth being constrained.

These factors provided the RBA with some breathing space to leave rates on hold while also providing time for international markets to become more settled after the events of the past three months.

Despite the absence of a change in rates at Tuesday’s meeting, the Reserve Bank remains concerned about the medium term outlook for inflation.

The comments from Tuesday’s meeting suggest the RBA will hold rates over the balance of this year, and potentially into the first quarter of next year.

Despite inflation being at the upper end of the RBA’s preferred (or target range), and expected to move higher, the Bank indicated that past interest rate increases and the knock on effect to the exchange rate, were effectively doing some of the work for the Bank.

This will provide welcome relief to borrowers across the economy, especially in the household sector.

The RBA will be on hold until, in its mind, stability has returned to the global economy especially Europe and the US; or the feared domestic inflation outcome and trajectory reach levels that are outside the RBA’s comfort zone.

Improved stability in offshore markets will contribute to enhanced consumer confidence which in turn should gradually see improved retail sales.

Australian consumers appear not to appreciate the current outperformance of the economy on a global scale. Events in Europe and the US hold disproportionate sway over sentiment in the domestic economy. China and Asian economies including India are the economies that drive the prospects for the domestic economy.

The next reading of the overall economy will be available in early September with the release of the June quarter economic growth numbers. These are expected to show that, although there has been some recovery from the weather events in the first quarter, the process is more drawn out than previously expected. Consumer spending is expected to be weak, although investment spending is likely to have accelerated. The savings ratio will have remained at or near recent strong levels.

Ahead of the growth numbers, the RBA will, at the end of this week, publish its quarterly Statement on Monetary Policy, which will provide an update of the Bank’s inflation and growth forecasts. This may likely introduce further volatility into financial markets, as the RBA could suggest inflation, and hence rates environment, higher than is currently reflected in market interest rates.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Reserve Bank influences mapped

Friday, July 08, 2011

The Reserve Bank maintained a stable interest rate environment when it left the official cash rate unchanged at 4.75 per cent per annum following its July Board meeting, with no change made since November last year.

For some time now, expectations have been built up for the resumption of policy tightening in the second half of 2011. Predictions mainly focused on a lift of 0.25 per cent per annum in August, immediately following the release of the June quarter inflation data in late July, with one additional increase of the same size before the end of the year. With August now almost here, there are signs emerging that the policy pause may be extended. The shift in thinking is being driven by both global and domestic factors.

On the global front, we have seen the re-emergence of concerns about European sovereign and bank debt with particular focus on the problems in Greece and Portugal. This has once again created instability in financial markets and increased the level of caution exercised by investors, businesses and consumers here and abroad. While there have been signs that the European and US economies are improving their level of economic activity, the data has been inconsistent and the growth evolution somewhat unconvincing. In particular, these major economies continue to struggle with very high levels of unemployment.

Interest rate settings in Europe and the US are likely to remain low for some time (albeit that the European Central Bank has talked about starting to move rates up) in order to stimulate demand in those economies. This diminishes the potential for there to be any pressure on Australian interest rate settings and supports the Australian dollar.

Domestically, the central theme of a shift toward stronger growth and rising interest rates remains in tact but there are signs that growth forecasts need to be trimmed and the timing of interest rate moves need to be adjusted. The global recovery picture is taking longer to develop and this is not adding to future demand expectations, especially given the negative effect on confidence of repeated episodes of financial market disruption. China continues to underpin the mining and commodity export boom in Australia, with high commodity prices continuing to generate very strong terms of trade. National income is being bolstered significantly as a result.

Other sectors of the economy are flat by comparison. The combination of a depressed global outlook, cost of living pressures, especially with respect to energy costs, plus uncertainty relating to the impact of the Government's move to price carbon dioxide emissions are driving a weakening of consumer and business confidence which shows up particularly in soft consumer spending and weak housing sector activity. Additionally, the strength of our dollar is limiting tourism and generating strong import competition for local businesses.

On top of this, the recovery from floods and other natural disasters that negatively impacted activity in the early part of 2011 is taking longer than originally expected. Employment growth has been strong in the early part of the year but more recently has slowed to a modest pace.

The growth outlook for Australia remains very positive but the combination of factors discussed above is taking the edge off activity. The strength of the resources sector appears to be offset by the flatness of many other parts of the economy. While ultimately it’s expected there will be a solid upswing in economic growth, this move is being restrained at present.

Inflation continues to be the dominant consideration for the Reserve Bank when it comes to interest rate policy setting. The current circumstances are also moderating the build up of inflationary pressures in the economy. In its latest statement, the Reserve Bank itself has softened its line on the upward shift in inflation expectations.

Underlying inflation, the measure preferred by the Reserve Bank (as opposed to headline CPI), is forecast to now develop gradually from the low end of the target band, whereas previously it was thought to be heading toward the upper end of the band over coming quarters. This shift in Reserve Bank thinking aligns with evidence of slower-than-expected (or delayed) economic growth. The next inflation numbers due out in late July will remain critical to the unfolding scenario of rising interest rates. They are not expected to show cause for action but rather to confirm a more benign environment in the short term.

Reflecting on past changes it must be remembered that the Reserve Bank moved quickly to 'normalise' interest rates once the stimulation put in place to combat the global financial crisis was no longer needed. Having already made this adjustment, future interest rate adjustments carry less urgency. With the raft of current signals pointing toward a more docile environment, the Reserve Bank can comfortably hold off any action preferring a more cautious approach until the need to act is made clearer through stronger data.

There is little risk at present of 'falling behind the curve'. Accordingly, it is unlikely that the Reserve Bank will act to raise interest rates in the short term. There is, however, still an underlying case for eventual tightening of monetary policy through further increases in the official cash rate. This may now need to await the passage of some months or potentially not until we move into 2012.

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When will we see the next RBA rate rise?

Thursday, June 09, 2011

The Reserve Bank Board once again kept the official cash rate steady at 4.75 per cent following its June meeting. The official cash rate has now stayed at this level for seven months.

For some time now, there has been a general consensus in the market that interest rates would be kept steady in the first half of 2011 and that over the later part of the year there would be a need to increase them. Now that we have arrived in the middle of the year with that viewpoint proving correct, the focus turns to whether rates will indeed move up over the balance of the year and into 2012.

Inflation, a key driver of monetary policy, has been benign for some time. In fact, the level of underlying inflation at the end of 2010 had fallen to the lower end of the Reserve Bank's target range. In the first few months of 2011, economic activity was negatively impacted by the severe floods in Queensland and other natural disasters. This translated into negative growth in the first quarter. Aside from the impact of these events, some sectors of the economy, principally consumer spending and housing have been soft for some time. In this climate, interest rates were left stable in order to provide support for a weak economy suffering from severe disruptions.

Looking forward, evidence is starting to build that not only will the economy move into a stronger growth phase but that inflationary pressures will build that will need to be contained through a lift in interest rates. Australia continues to benefit from historically strong terms of trade as a result of record commodity prices. Exports of hard commodities such as iron ore and coal have been stimulated by demand, particularly from China which continues to produce very strong growth rates. National income has risen strongly as a result of the strong demand and high prices.

In turn, investment in resources has been significant and continues to be the dominant element in the performance of the economy. This investment is creating greater demand for skilled labour in an employment market that is already experiencing low levels of unemployment. As economic activity builds and conditions generally improve and rebuilding takes place in the areas adversely affected by the earlier natural disasters, further pressure will be placed on the labour market. Improved levels of wages growth have been evidenced in recent months and this is likely to feed into a more general lift in prices over time.

The latest reading on inflation for the March quarter showed a significant upward spike. This, however, was largely the result of supply shocks arising from the floods and other events that dramatically raised the prices of some commodities and produce. Accordingly, this can be discounted as a one-off event and not indicative of the true underlying price developments in the same way that the disruption to economic growth was only a short-term impact. The underlying inflation measure does appear to have started to rise from its low point. Price increases for utilities, in particular, have been progressively increasing. The upward trend in underlying inflation is expected to continue over time influenced by stronger growth and tight labour market conditions.

The Reserve Bank itself is now forecasting that underlying inflation will move toward the top of its target range over the balance of 2011. It is this potential development that is behind the need to raise interest rates at some time over coming months.

More recently, we have seen world economic growth expectations soften, particularly for the developed economies of Europe and US. This can potentially have a moderating effect on global demand which could have a flow-on effect on Australia, even if only through sentiment and the negative wealth effects generated by falling equity markets. This is not expected to have a significant impact with Australia's fortunes very much linked with China these days. There is some prospect though that slower world growth, weaker sentiment and disruption to markets could limit the pace of change in Australia. To that end, there could be a slower increase in inflation with increase in interest rates delayed.

For the reasons outlined, it remains highly likely that the Reserve Bank will raise the official cash in coming months. The decision to act will be closely linked to the pace of change in the inflation rate. The release of the June quarter figures in late July will be an important guide. In the event that inflation is moving up quickly, the Reserve Bank could lift the official cash rate as early as August. If that is not the case, the change may come in the latter part of the year. By the end of the year, though, the official cash rate is expected to be 0.25 per cent higher at five per cent.

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The Reserve Bank maintains stable interest rates

Wednesday, May 04, 2011

Written by Michael Witts, Treasurer, ING DIRECT

The Reserve Bank again opted for stable interest rates leaving the official cash rate unchanged at 4.75 per cent at its May meeting.

As previously indicated by the Bank, the Board chose to look through the higher CPI outcome, which was largely due to the impact of the summer floods and cyclone.

Further, the Bank observed that these one-off effects would be largely unwound over coming quarters.

The Bank highlighted the impact of the ongoing substantial rises in utilities costs contributing to the overall increase in consumer prices.

While the Bank noted that the rising value of the AUD, especially against the USD, will assist in holding down consumer prices of traded products in the near term, over the longer term inflation is expected to increase in line with the improvement in economic conditions.

Adding to the potential deterioration in the inflation outlook, the Bank commented that the tightness in the labour market especially in the resources and related sectors is contributing to higher wages growth. The risk is that this growth starts to spill over to the broader economy.

The near-term neutral outlook for interest rates is supported by the likely decline in real growth over the March quarter. This outcome reflects the combined impact of the cyclone and floods at the start of the year, together with the slower, than anticipated, recovery to normal production levels in key affected sectors.

Progressively over the coming financial year, economic growth is expected to recover, as the rebuilding phase of the recovery from these disasters together with ongoing investment in the resources sector accelerates.

Reflecting ongoing caution from the household sector, consumer spending remains tepid, despite the strength of the labour market consumers remain reluctant to borrow. Growth in household credit is weakening, together with housing prices in several cities.

The prospect of a tough Federal budget is not expected to improve consumer sentiment.

The Reserve Bank again confirmed that the mildly restrictive stance of monetary policy remained appropriate.

The expected near-term direction of interest rates remains largely unchanged following the RBA Board meeting.

The market view suggests the RBA will be on hold until into the September quarter. Most likely timing of a move by the RBA is following the August meeting. At this meeting, the Board will have the most recent reading on CPI, as well as data on growth and the labour market.

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The Reserve Bank’s steady hand

Wednesday, April 06, 2011

The Reserve Bank Board again opted for stable interest rates when it left the official cash rate unchanged at 4.75 per cent at its April meeting. This is the fourth meeting in a row at which it has maintained a steady cash rate.

The immediate outlook for interest rates is for a continuation of a 'no change' approach by the Reserve Bank. As we move deeper into 2011, however, it is expected that developments in the economy will necessitate a return to a mild tightening of monetary policy that would see interest rates raised again in the latter part of the year in order to contain the emergence of a higher level of inflation.

For some time now, there has been a general consensus view of the prospects for the Australian economy over 2011. That view has been based around a softness in demand in the first half of the year with consumer spending, in particular, remaining weak and then a higher level of economic activity coming through in the second half of the year fed by high levels of investment in the mining sector stimulating the broader economy, especially through increased employment. 

It is very clear that the consumer has been conservative over recent times and this is expected to continue for a little while. People are generally more cautious in the current environment and are preferring to save more or repay debt rather than spend. This condition has been heightened by concerns over increased utility charges which could be further exacerbated by the proposed introduction of a carbon price, unless there is clearly communicated compensation. The floods and other natural disasters in the early part of the year have further dampened sentiment and disrupted activity. The tragic events in Japan and the spike in the oil price due to unrest in the Middle East and North Africa have also acted to dampen the global economic outlook which has in turn added to the conservative attitude to spending. The generally weak tone in the economy and offshore uncertainties have certainly influenced the Reserve Bank to leave interest rates on a more accommodative setting.

Economic activity is not going to stay soft. The current conditions will progressively give way to a stronger rate of activity. This will be influenced by a number of factors. Firstly, the many events both overseas and at home that have lowered confidence will reduce in terms of the intensity of their effect and the initial negative impact on economic activity will give way to improved levels as concerns wane and conditions generally return to normal. Secondly, the underlying performance of the global economy is showing clear signs of improvement with advances in the developed economies (particularly the US and Europe) adding to the already robust growth coming out of the Asian region and China in particular. This will provide further support to the Australian economy which is already the beneficiary of historically strong terms of trade due to record commodity prices. In this improving climate the increased investment that is going into mining and related industries will produce increased activity across the economy and stimulate employment growth which is already strong as evidenced by a low unemployment rate of five per cent that is expected to continue to fall, albeit at a more moderate pace.

Inflation has been low in recent readings and is likely to remain within the Reserve Bank target band of two to three per cent for some months yet with the strength of the Australian dollar offsetting some potentially concerning price influences such as a rising world oil price, which is expressed in US dollars. This also supports a 'no change' rate setting over coming months. The longer-term prospect is though that as we move deeper into 2011 the higher level of economic activity against a background of an already tight labour market will generate wages pressures. Rebuilding efforts in flood and other disaster affected areas will also add to demand. As this scenario unfolds there will be a general build up of broader inflationary pressures in the economy.

In response to rising inflation in the latter part of 2011, the Reserve Bank is expected to need to increase the general level of interest rates by raising the official cash rate to ensure the economy does not grow too rapidly and generate even higher levels of inflation that could have damaging longer term consequences if not brought under control early. Increases of the order of 0.5 per cent in the official cash rate (by way of two 0.25 per cent moves) are likely over the final months over 2011. This adjustment will potentially start around August with a second change in the final few months and would see the official cash rate end 2011 at 5.25 per cent.

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Looking at the RBA’s latest rate decision

Thursday, March 03, 2011

At the March meeting, the Reserve Bank Board left the official cash rate unchanged at 4.75 per cent making it the third time in as many meetings the Board opted for a stable outcome. This decision is consistent with the recent messages being delivered by the Reserve Bank and was almost universally expected in the market.

The Reserve Bank is continuing to indicate a significant degree of comfort with the immediate outlook for inflation and interest rates, implying that the official cash rate could remain steady for some months to come. The longer-term outlook, however, remains one in which there is expected to be a need to raise interest rates again to contain the potential for higher inflation as the economy moves into a stronger growth phase later in 2011.

At the last official reading on inflation released in January for the year ended December 2010, the Consumer Price Index (CPI) had indicated an annual increase in prices of 2.75 per cent. This was down from readings earlier in 2010 that were above three per cent. More importantly, the underlying measures of inflation, those that strip out extraordinary items and that the Reserve Bank prefers to focus on, had fallen to around 2.25 per cent which is at the bottom end of the range targeted by the Reserve Bank, being two to three per cent.

The Reserve Bank has made statements on a number of occasions in recent weeks and months that it expects inflation to remain consistent the target range over the year ahead. This provides considerable guidance on expectations in relation to monetary policy application as it indicates that the Reserve Bank is not seeing a need to contain inflation in the immediate period ahead. Having said that, it could be that a move to the higher end of the range over time would see a shift in attitude to ensure that inflation did not move outside of the range. It is generally expected that such a scenario will not develop in the next few months and that the cash rate will be left unchanged until at least around the middle of the year.

Adding to the perception of interest rate stability has been the flooding in Queensland and Victoria and the other natural disasters that have occurred in the last month or two. These events have had, and for the immediate future will continue to have, an adverse effect on economic activity. Prices of some produce and resources have spiked due to supply disruptions but it is the Reserve Bank's practice in situations such as this is to look through the immediate effects to the medium term prospects for economic activity and prices. In this regard, it is expected that interest rate stability will prevail as the economy continues to grow at a moderate rate without any immediate concern regarding inflation.

Also adding to the softer short term view of economic activity is the fact that the household sector continues to exhibit caution in relation to spending and borrowing with increases in the savings rate evident, either as savings or debt repayments.

Looking at the longer term though, there continues to be a picture developing whereby economic activity accelerates with price pressures emerging over time which would trigger a return to tighter monetary policy settings through further increases in the official cash rate.

Australia is the beneficiary of historically high terms of trade as the prices for our commodity exports have risen to record levels. This has mainly been fuelled by the very strong growth numbers coming out of China and to a lesser degree India and the associated strength of demand for our raw materials, in particular iron ore and coal. This regional economic strength has not only provided a significant stimulus for Australia but has also kept world economic growth at higher levels while the major developed countries in Europe along with the US have struggled to claw their way out of the post-GFC recession they have been gripped by.

While there is still a long way to go for the major developed economies, especially in relation to weak employment growth, there are signs emerging that growth rates are steadily improving. This will ultimately add to the world growth rate. In this scenario commodity prices will remain firm for some time and Australia will continue to enjoy elevated terms of trade which will in turn drive high levels of national income. Investment is rising in response and this will also drive greater economic activity.

The downside is that this bright outlook for Australia is unfolding against an already tight labour market backdrop. The unemployment rate has fallen to around five percent and any further advances in employment are likely to trigger wages pressures as skill shortages emerge and it becomes harder for employers to attract suitable workers. There have already been signs in recent months that wages growth is starting to accelerate and this trend is likely to continue. Wage increases will feed into prices which will also be growing as the result of an improving economic outlook and an elevated demand for goods and services.

As we move deeper into 2011, the current benign outlook for inflation is anticipated to give way to a rising inflation scenario, albeit not an aggressive one. In this context the Reserve Bank can be expected to shift its stance on monetary policy and resume a mild tightening program to contain the emergence of inflation. Increases in the official cash rate of the order of 0.5 per cent can be expected over the second half of the year, taking the official cash to 5.25 per cent by December.

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An economic update following RBA’s February meeting

Thursday, February 03, 2011

The decision by the Reserve Bank Board to keep the cash rate steady at 4.75 per cent in February reflects softer-than-expected inflation data and the short-term impact of the Queensland and Victorian floods on business activity. However, there are clear signs the Reserve Bank will need to further tighten interest rates later in 2011.

Since the last meeting of the RBA Board held in early December, the inflation data continued to show moderation in price pressure in the economy. The Consumer Price Index (CPI) rose by 2.75 per cent. Underlying inflation measures, which the RBA focuses on, fell further to be around 2.25 per cent, which is at the bottom of the target band of two to three per cent that the RBA looks to maintain. This indicates that inflation is not an immediate threat to the economy and in current trend terms has been moving lower. The RBA has expressed the view that inflation should remain subdued for some months.

The floods have had a significant impact on economic activity at the beginning of this year. This is particularly so for areas in Queensland where agriculture (fruit and vegetable production) and mining (coal) have been hard hit. Additionally, there has been a general disruption to business activity. The reduced activity will lower national economic growth in the early part of 2011. At the same time, the disruption to supply of certain products, principally fruit and vegetables, has led to sizeable price increases. While this will have an adverse impact on the CPI lifting the headline view of inflation, the RBA's practice in the past with disruptions like this caused by natural disasters has been to look through the raw short term data to the more medium term view of inflation. This means that the RBA is highly likely to hold to its current view that inflation will remain subdued for some months, potentially well into 2011.

Adding to the softer view of economic activity has been restrained retail spending, lower levels of consumer borrowing and an associated increase in the savings rate.

So in the short-term, it can be reasonably expected that the official interest rate will remain on hold.

The longer-term picture, however, continues to be one in which there will be a resumption of tighter monetary policy settings through further increases in the official cash rate.

The immediate effects of the floods will pass and economic activity will pick up, albeit that this will be a progressive and uneven recovery path. The task of rebuilding in effected areas will also add to economic activity over time. The 'reversal' of the flood effect is most likely going to coincide with a general lift in other sectors of the economy, principally mining and the associated export of commodities such as iron ore and coal. Australia is enjoying historically high terms of trade thanks to record commodity prices and this has been driving and will continue to drive significant growth in national income. Investment levels are increasing in response to the favourable conditions and this will facilitate a further uplift in activity as we move through 2011. The level of growth in the second half of the year in particular is likely to be quite significant as these factors come together. Additionally, there are increasing signs that the global economy is moving to higher and more sustainable rates of growth as the US and Europe continue to emerge from the recessionary past into improving growth positions. China and India are maintaining high rates of growth and this is continuing to boost the outlook for Australia.

The brighter growth outlook for Australia is unfolding against an already tight labour market backdrop. Jobs growth over 2010 was very strong and the unemployment rate fell sharply. While in the immediate period employment growth appears to be slowing down, there is limited capacity to support a higher level of demand into the future. Capacity constraints and skill shortages are expected to emerge as we progress into the latter part of 2011 and this is very likely to bring with it wages pressure as demand for skilled workers exceeds supply. There have already been signs in recent months that wages growth is starting to accelerate after a relatively long period of moderate growth since the initial impact of the global financial crisis was felt. Wages pressure will generally add to price pressures which will also be emerging due to the impact of an improving economic outlook and an elevated demand for goods and services.

As this scenario unfolds, the RBA is going to need to act to contain inflation, to ensure that the economy does not overheat and that sustainable growth rates can be maintained. Therefore, it is highly likely that the RBA will move to tighten monetary policy in the second half of 2011. The extent of this action will probably see the official cash rate raised by 0.5 per cent taking it to 5.25 per cent by the end of the year.

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2011’s cash rate outlook

Thursday, December 09, 2010

After having surprised the market last month, the Reserve Bank delivered a predicted result by leaving the official cash rate unchanged at 4.75 per cent following the December Board meeting.

There have been a considerable number of factors that changed in the economic and market environment over the course of the last month and taken together these changes contributed to a stable outcome for the balance of 2010. Furthermore, it is now highly likely that the Reserve Bank will maintain a stable cash rate for some months to come, potentially well into 2011.

The following summarises the key changes observed.

  • Banks added to the impact of the November official interest rate rise by further increasing the rates charged to borrowers due to the need to pass on increased funding costs.
  • Retail sales for October showed a decline.
  • Credit growth remained subdued.
  • The unemployment rate reported for the month of October rose to 5.4 per cent from 5.1 per cent.
  • Australia's third quarter economic growth rate slowed considerably relative to growth rates evidenced in the first half of 2010.
  • Concerns re-emerged in relation to the debt levels and fiscal position of a number of European countries and the stability of their banking systems, particularly Ireland which was ultimately provided with a rescue package by the European Union and the International Monetary Fund.
  • These latter events in Europe further unsettled global financial markets.
  • All these factors followed on from the third quarter inflation data that showed that inflation at that time was continuing to fall and had settled at the bottom half of the Reserve Bank target range, albeit that the Reserve Bank was forecasting inflation to rise to a higher level over time.

In the days leading up to the latest Board meeting the Governor, Glenn Stevens acknowledged that the climate since the last meeting rate increase had shifted particularly given the additional rate changes added by banks and that lending rates, which the Reserve Bank is more focused on now, were at an appropriate level, being a little above average, and that policy may not need to be adjusted for some months. This gave a significant signal that there would be a 'no change' decision at the December meeting or indeed potentially for some months. Caution does need to be exercised, however, as a statement at a point in time will not necessarily hold for very long if the data moves in a manner to negate that view.

So, while there is considerable comfort in the immediate future that the official cash rate will not move again, there is still a longer-term view that there is potential for higher inflation to develop and that action will need to be taken to arrest this via tighter monetary policy. Australia is the beneficiary of record commodity prices and extremely favourable terms of trade. This is boosting national income through very strong export performance, driven in the main by strong demand from China for our iron ore and coal in particular.

The labour market is very strong despite the recent increase in the unemployment rate which was driven by a rise in the participation rate as more people joined the search for work. Investment, especially in mining and related areas is significant and it is highly likely that as the economy expands on the back of the mining boom pressure will be brought to bear on a tightening labour market that will ultimately translate into higher wages and a more general push on prices. The Reserve Bank's current outlook for inflation is that it will be little changed over the next few quarters before it increases over the medium term as the economy expands.

There has been evidence of a 'two-speed' economy with the commodity driven sectors such as mining being super-strong and interest rate sensitive sectors such as retail spending and housing being under pressure from a series of interest rate increases that have negatively impacted consumer confidence and reduced the capacity of households to spend. Monetary policy cannot be applied in a differential manner to slow one sector whilst leaving others to improve their growth.

The Reserve Bank has a difficult task at present in balancing the short term actual performance of the economy and inflation against the longer term potential outcome. In this situation, it is anticipated that a reasonable pause in the application of tighter policy will breathe some life back into the weaker sectors before there is a need to apply the brakes again to avoid overheating in the totality of the economy, led by the booming mining and export activity. Expect no rate change until well into 2011, probably May at the earliest but then for there to be rate increases of up to 0.5 per cent over the balance of 2011 to take the official cash rate to 5.25 per cent by the end of that year.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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The Reserve Bank’s November surprise

Wednesday, November 03, 2010

The Reserve Bank surprised the market for the second month in a row when it raised the official cash rate by 0.25 per cent to 4.75 per cent following the November Board meeting. Last month, the Reserve Bank left the rate unchanged when expectations were high that it would increase it. Those expectations which had been fuelled by comments by the Governor, Glenn Stevens and other Reserve Bank officials in public forums were proven wrong with markets misreading the timing of the intention to start tightening monetary policy.

The market was wrong-footed again when softer inflation data for the third quarter of 2010 led to the view that the Reserve Bank could abstain from action in November and potentially for a few more months.

What was behind this misjudgement by so many?

The primary and fundamental difference is that the Reserve Bank is looking forward at where it expects inflation to be and not at where it has been. Having said this though, it is hard to see what has changed significantly between the October and November meetings. The only news we got on inflation was that it had trended down in the past quarter. So the Reserve Bank is putting a lot of weight on inflation increasing in the future and soon enough for it to see a need to lift interest rates now to head off that development. The puzzling thing for the market is why that wasn't the case a month earlier.

The Reserve Bank has been making the case for some weeks now for the need to move into a restrictive phase of monetary policy. It had paused for six months after completing an initial round of rate increases totalling 1.5 per cent that were designed to remove the emergency rate settings put in place to offset the depressing effects of the global financial crisis. The move this month is the first of a new series designed to limit the speed of growth in the economy to avoid an inflation spike. It has been well documented that the economy is expected to move to an above trend growth rate on the back of a mining boom led by the strength of China and its demand for our commodities, particularly iron ore and coal.

Commodity prices are at record levels and our terms of trade have also jumped to levels not seen for decades (in fact, since the last mining boom). With strong jobs growth having already led to a low level of unemployment there is a high potential for skill shortages and capacity constraints to emerge which would place pressure on wages which in turn would feed into more general price inflation.

The Reserve Bank sees future business investment as being very strong, particularly in mining and related activities with this also having a general flow on effect across the economy.

In addition to the rosy outlook for the local economy the Reserve Bank is now less concerned with the global environment than before and observed that financial markets turmoil is abating. In this overall context, the Reserve Bank has moved to head off any potential for inflation to spike upward. This interest rate move can be characterised as 'preemptive', designed to limit future potential for inflation before it emerges.

The CBA announcement that it is increasing mortgage rates by more than the Reserve Bank's 0.25 per cent increase in the official cash rate sees action on the long-argued need for banks to recoup cost of funds increases. If this proves to be a general shift across the major lenders (which is highly likely given the commonality of commentary on this point) then it will impact future monetary policy considerations. Additional increases in lending rates will have a stronger impact on the economy, effectively acting like a larger official interest rate move. This will undoubtedly be taken into account in future Reserve Bank policy evaluations.

There is sizeable potential for this 'double' shift in rates to slow down the economy faster than the Reserve Bank intended. The housing sector and retail spending are likely to be heavily impacted in the short term. Retailers will undoubtedly now be resigned to a weak Christmas shopping season. The Reserve Bank will need to watch developments for some time before adjusting rates again. This should take us well into 2011 before any further change is made. It is, however, still a strong prospect that rates will need to rise over the course of 2011 driven by the mining boom momentum in the economy. There should, though, be a reasonable pause before the next rate increase.

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Cash rate steady for fifth month

Friday, October 15, 2010

The October decision by the RBA to hold the official cash rate steady for the fifth month in a row at 4.5 per cent extends the pause in a rising rate cycle.

Most market economists and commentators had anticipated an increase this month, their views being influenced by recent comments by RBA Governor Glenn Stevens which suggested that higher interest rates could be expected at some point in the future due to the strong economic growth being experienced in Australia. The September RBA meeting minutes also reinforced this expectation.

Some analysts remained of the view that the RBA would take a wait and see approach, with third quarter inflation data being released later this month, before recommencing their tightening cycle. This data now becomes critical to the next assessment of monetary policy at the November RBA meeting.

In announcing the latest decision, the RBA again made reference to uncertainty in financial markets and strained conditions in some countries in Europe. The global setting is still providing a cautionary backdrop to the RBA decision process.

Despite some softer domestic economic data over the last week, including easing house prices and lower than expected results for building approvals and retail sales, the RBA expects the Australian economy to continue growing at around trend, with an increasing contribution to come from the private sector, as it benefits from increasing strength in the terms of trade. This rising private sector demand will offset the reduction in fiscal stimulus that is occurring as the measures taken by the government during the financial crisis either end or diminish over time.

Unemployment is currently sitting at 5.1 per cent having resumed its fall in recent months and jobs growth remains strong. The strong labour market is indicative of a strong economy. Further strong growth may, however, lead to capacity constraints in some sectors which may, in turn, give rise to wage pressures and feed into higher inflation down the track.

China has continued to produce strong growth and their demand for our commodities (iron ore and coal) is a significant driver of exports and economic growth in our economy. It is this, combined with high commodity prices, that is providing a significant boost to national income.

Australia has for some time been benefitting from the strength of the Asian region, led by China, and this has insulated our economy from the concerns evident in Europe and the US. In any event, concerns about further deterioration in the European and US economies have not materialised at this point but the RBA expects growth in these economies to be modest in the near-term. Some encouraging data out of the US over the last week, including economic growth numbers which came in above expectations and improvements in personal consumption and jobless claims, have helped ease fears of a flagging recovery and possible double dip recession.

Looking ahead, the RBA has clearly signalled that it expects higher interest rates will be required in the future. The market is still pricing in the chance (albeit reduced) of an increase before Christmas. The RBA's October decision has given market participants reason to pause and reevaluate monetary policy expectations.

While the RBA has indicated its view on the direction of interest rates, it has said nothing (and won't) about timing. The factors influencing its decision process continue to be, on the one hand, the state of the global economy and markets which have been undergoing difficult and volatile times and on the other hand the strength of the local economy and the outlook for inflation. The RBA has been balancing these factors in recent months in favour of a 'steady as she goes' approach to interest rates.

It is highly evident that the balance is shifting and that the RBA is close to commencing the next phase of monetary policy tightening. It should be remembered that the interest rate rises seen in the latter part of 2009 and the early part of 2010 were designed to remove 'emergency settings' designed to offset the impact of the financial crisis. The next phase will be embarked upon to restrict excessive growth, which could lead to imbalances in the economy and the emergence unhealthy rates of inflation.

The RBA will also want to ensure that it does not start this restrictive phase too soon as this could derail the healthy growth developing in the private sector, especially in interest rate sensitive sectors such as housing and retail sales. As indicated, the third quarter inflation data holds the key to interest rate considerations in the short term.

Given that inflation is sitting at the top of the RBA target band, it will probably require a fall in the inflation readings to keep the RBA from raising rates at the November meeting. One proviso would be that there are no new shocks to the global economy, which obviously still remains a factor in the RBA assessment.

Regardless of whether the RBA moves in November or not there is a very high likelihood that the monetary tightening cycle will recommence within the next few months and that it will continue well into 2011. Increases in the official cash rate of around one per cent are likely over the next twelve months as the local economy moves into above-trend growth and the global economy further stabilises and global economic growth improves.

What does the hold on interest rates mean for your investments? Commsec's Craig James explains.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Safe for another month

Wednesday, August 04, 2010

The Reserve Bank left the official cash rate unchanged at 4.5 per cent per annum for the third month in a row following its 3 August meeting.

The decision was made after the release of tame second quarter inflation data on 28 July. This information had been seen as a critical component of the Reserve Bank’s decision-making.

In the lead up to the latest meeting, there had been considerable speculation in the market as to, firstly, what the inflation readings would look like and, secondly, what the Reserve Bank would do in response to the actual inflation numbers.

As the release of the inflation data drew near, there was a gathering view that inflation would remain uncomfortably high and that the Reserve Bank would need to act to contain it. Market opinion surrounded a rise of 0.8 per cent to 0.9 per cent for underlying inflation for the quarter, which would have kept the annual underlying inflation rate above the target ceiling of three per cent. As it eventuated, the rise in underlying measures for the quarter was only 0.5 per cent and the annual change in underlying inflation came in at 2.7 per cent.

In its previous month’s commentary, the Reserve Bank indicated that one of the factors influencing its ‘no change’ decision was the fallout from the latest developments in the European debt crisis, which arose in May and persisted into July. The Reserve Bank wanted to see these concerns, which had the potential to dampen global growth and in turn soften the positive external influence on Australia, subside before moving to further dampen local demand through higher interest rates.

The recent stress tests conducted on European banks by the European Central Bank were seen as an important indicator with respect to the European debt scenario. As it eventuated, these tests showed that the majority (nearly all) of 91 European banks tested had a strong capital position and could withstand further market stresses and maintain the required level of capital. This positive news, on top of the inflation expectations, added to the market perception that the Reserve Bank might increase the official cash rate at the August meeting as one of the factors suggesting a cautious approach had been significantly diminished.

Going forward, there remains the likelihood that, at some time in the future, interest rates will need to be increased further. Forecasts for the Australia’s economic growth remain strong and the government has recently revised upward the revenue improvements that will flow from the high terms of trade and the export boom that continues to be fuelled by China’s significant growth and demand for our raw materials, particularly coal and iron ore.

The timeframe for further monetary policy tightening, however, remains clouded. Inflation seems under control for now but is forecast to increase over the course of 2011. Global growth is building slowly but is temporarily obstructed by both the European debt concerns and the lack of job creation in the US (evidence of the shallowness of the recovery taking place there).

As 2011 unfolds, the global economic picture should strengthen and this will add fuel to the local inflation outlook as growth generally, and mining sector growth in particular, expose capacity constraints, in turn putting pressure on wages and prices.

Australia’s labour markets have remained strong throughout the economic downturn and, while unemployment rose, it did not reach anything like the levels forecast and has fallen quickly to be back around – and potentially ready to go below – five per cent. Any lift in economic growth from a stronger world scenario will undoubtedly put pressure on labour markets and it is hard to see this not feeding into wages costs and ultimately inflation more generally.

In the short-term, there are also some indications that the tightened monetary policy to date has had a softening effect on domestic demand. While this may not remain the case, it is also a sobering factor for Reserve Bank consideration over the balance of 2010. Areas of the economy that have slowed as a result of interest rate increases include housing finance and home sales – of which have also seen house price growth slow, building approvals and consumer spending.

Given the current acceptable inflation readings and pockets of softness in the economy, it is most likely that the Reserve Bank will leave interest rates on hold until its November meeting, just after another quarterly reading on inflation in late October. In the longer term, however, it is still expected that improving global growth, and the positive effect this will have on Australia, will lead to higher interest rates over the course of 2011.

Australian households seem to be conscious of the need to contain debt to soften the potential impact of higher interest rates. A key finding of the ING Direct Financial Wellbeing Index for 2010’s second quarter is that households are acting to reduce debt. This is both for short-term debt such as credit cards and longer-term debt like mortgages. The research found that households are placing a priority on debt reduction.

The median credit card balance fell from $1802 in quarter one to $1673 in quarter two. The median mortgage balance in quarter two was $175,509, down from $177,259 in quarter one, despite house prices and average loan sizes continuing to increase over that period.

The ING Direct Wellbeing Index measures the level of household comfort across a range of aspects of household finances such as debt levels, income, savings, investments and ability to meet household bills. The latest results show that while households remain generally comfortable with their level of debt they are taking action to reduce it. This action will help cushion the effect of rising interest rates.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Onto plan B for the Reserve Bank

Tuesday, July 13, 2010

As widely, almost universally, expected, the RBA again left the official cash rate unchanged at 4.5 per cent at its 6 July meeting.

The events of the past couple of months have led to a significant shift in opinion about the expected course of monetary policy over the balance of 2010 and beyond. Only a few months back, there was still an expectation that, although the RBA had effectively engineered lending rates to be close to normal levels, ongoing solid economic growth combined with stubbornly high inflation readings would lead to further monetary policy tightening of the order of 0.5 per cent before the end of 2010. This would have taken the official cash rate to five per cent per annum.

The view beyond that was, under the weight of mining boom-induced growth rates, the RBA would need to enter into a restrictive phase for monetary policy and move the cash rate toward six per cent during 2011. All this was subject to there being a measure of ongoing stability, if not positive signs, in global markets.

Well, global markets have been anything but stable. Concerns about European debt levels reemerged during May and have generally dominated market thinking, resulting in significant equity market falls. Pledges by the G20 countries to stabilise and then reduce debt levels only served to add to the weak global growth picture with there being a further deterioration in confidence and a further flight to safety. Risk aversion has been the predominant theme in markets and this has produced major downturns in equities and a reticence to buy debt securities, which has again frustrated the ability of banks to borrow to fund lending.

This market instability and the negative flow on effect on confidence mean that the outlook for world growth remains subdued. Even the robust economic performance in China and Asia is generally anticipated to ease. Central banks, including the RBA, will be cautious in the application of monetary policy in such an environment. They will want to ensure interest rates remain accommodative of growth.

So not only did the RBA leave the official cash rate on hold this month but there is a high likelihood that it will continue to leave monetary policy settings steady until there are clear signs that the global economy is regaining some positive growth momentum.

While locally there continues to be talk about our stubbornly high inflation readings and the need to subdue them, there have been domestic indicators that are suggesting that past interest rate increases are having a depressing effect on growth. These include:

  • Sluggish retail sales
  • Slower housing finance growth
  • Lower building approvals
  • Lower auction clearance rates
  • A pullback in consumer confidence

These factors also give the RBA reason to hold off on any further interest rate increases in coming months until there is greater surety that the economy is not slowing down.

An interesting feature of the current market is the effect global economic weakness has had on longer-term interest rates across the developed world. The concern about world growth has pushed these longer rates down including Australian government bond and interest rate swap rates – the latter being a major factor in determining fixed-term funding costs for banks and therefore the level of fixed interest rates they offer for home loans.

The differential between fixed rates and variable rates is narrowing due to the cash rate remaining steady while swap rates fall. Since the official cash rate was raised from 4.25 per cent to 4.5 per cent in early May, the five-year swap rate, for example, has fallen from around 5.9 per cent to 5.3 per cent. While this shift has not yet been fully reflected in five-year fixed mortgage rates, these rates are in decline.

With longer-term expectations remaining that once the present difficult global environment passes Australian interest rates will again need to move higher, these lower levels of term interest rates may offer effective protection against future potential rate rises. The reducing differential to borrow fixed is lowering the cost of insurance in uncertain times and borrowers that can be severely affected by large future interest rate increases should seriously consider this option.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Interest rates – where to from here?

Thursday, May 06, 2010

The RBA increased the official cash rate again today by 0.25 per cent p.a, taking it to 4.5 per cent p.a. This is the third increase in as many months and the sixth rise since policy tightening began in September last year. The cash rate has now been raised by 1.5 per cent p.a. following its low of three per cent p.a.

For some time now discussion around monetary policy has centred on the declared position of the RBA to remove ‘emergency’ rate settings and to take interest rates back to a neutral or normal level. The RBA has in recent times made it clear that it is focusing on lending rates (which due to cost of funds pressures have been increased by banks over and above the size of official cash rate increases) and that we are now getting close to a level that could be considered normal. There is still some conjecture in the market as to when the monetary policy setting will actually be considered neutral but all indications are that we are quite close, possibly within 0.25 per cent p.a. or 0.5 per cent p.a. of that point.

The question arising now is where will interest rates go in the longer term?

There are a number of factors arising that suggest that the RBA may have to eventually go beyond the neutral level. The Australian economy is continuing to perform strongly with 2009 GDP growth coming in at 2.9 per cent, and forecasts are being upgraded for growth over coming quarters. Expectations are now that the economy will grow at a rate of between three per cent and 3.5 per cent.

The global economy is recovering and confidence is high in the future. Whilst interest rate increases to date appear to have acted to slow some sectors such as retail sales and housing finance there is a generally high level of expectation that Australia will experience healthy levels of activity into the future. Much of the confidence is being driven by the strength of the Asian region and China in particular which is driving significant increases in commodity prices.

As a result Australia’s terms of trade are undergoing another significant boost and this will generate strong growth in national income through the increased export revenue, especially from coal and iron ore.

The labour market has been extremely robust and unemployment has fallen significantly over the past year, as opposed to the increase that was originally feared as a consequence of the global financial crisis. Given the general expectations for the economy, employment is forecast to continue to keep growing and there is likely to be capacity constraints and skill shortages in the booming resources sector. Subsequently we could see the emergence of some wage pressures as companies bid up the price of skilled workers.

With the latest inflation data indicating that inflation is not abating as quickly as expected but remaining at the top of the RBA target range of two per cent to three per cent, there is the prospect that further monetary policy tightening will be required to stave off an unhealthy development on that front.

In recent months the RBA has also made references to rising house prices and the need to avoid a bubble developing which could later threaten stability. The latest data continues to show that house prices are growing at a very healthy rate. They were up by almost five per cent in the first quarter of 2010 and have risen around 20 per cent from a year ago. These price moves are being driven by fundamental supply and demand factors. There are simply not enough houses being built to meet the demand. With immigration numbers climbing to record levels this trend is not expected to abate any time soon and the RBA may need to use tighter monetary policy as a tool to cool the market.

On the other hand, we have seen some signs that recent interest rates rises have had some bearing on consumer sentiment and spending. This has only been modest so far and will certainly be an area to watch in future. Confidence in the economy is generally high and the resources boom is likely to continue to drive this.

All things considered, there is a case building for the RBA to need to move from simply removing ‘easy’ interest rate settings into a restrictive phase. This is where it takes interest rates higher in order to ensure the economy does not overheat, leading to inflation concerns and unsustainable house price increases. Over the balance of 2010 the official cash rate will probably be shifted upward to five per cent p.a., a level considered to be at or slightly above a neutral positioning. In 2011 there is a growing prospect that interest rates will need to move beyond this level and toward six per cent p.a.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



On the RBA decision

Thursday, April 08, 2010

The RBA increased the official cash rate again this month by 0.25 per cent pa taking it to 4.25 per cent pa. This represents the fifth increase of 0.25 per cent since the RBA commenced raising the cash rate in September last year.

The RBA has indicated on a number of occasions that the low level of interest rates it created at the beginning of 2009 (by moving the official cash rate down to three per cent pa) was no longer required as the fear of recession had passed. In September the RBA embarked on a process of ‘normalising’ the cash rate. This has been generally interpreted as meaning that the cash rate would move back to around five per cent pa over the balance of 2010. The ‘normal’ level has historically been a little higher than this, say around 5.5 per cent pa to six per cent pa, but the RBA has more recently been focusing on bank lending rates which have moved higher by around another one per cent pa than moves in the official cash rate due to cost of funding pressures experienced in the markets. Taking this into account the RBA is expected to move the official cash rate up to around five per cent pa.

There is little prospect that the RBA will not execute this strategy. The main question still relates to the pace with which the interest rate increases will come. After today’s move there is the prospect that there could be a pause for a month or two. Interest rates are still expected to increase by 0.25 per cent pa another three times over the next eight months.

The Australian economy has been performing exceptionally well and further signs of improvement in the global economy are adding to the impetus behind the Australian economy. Of particular significance is the ongoing rise in commodity prices which continues to boost Australia’s terms of trade and revenue prospects. China continues to post impressive growth numbers and its demand for our raw materials is a major factor driving Australia’s strong export performance. In the US economic growth has improved considerably over the past few quarters, albeit from a very weak starting position, and there is now encouraging news on the employment front with the dramatic job losses over the last two years having abated and job growth starting to emerge on a monthly basis. These factors are leading to improved confidence in the global recovery, which in turn is fuelling commodity price rises and the outlook for Australia.

On the domestic scene, Australia continues to experience strong employment growth. The gloomy forecast of a year ago for an 8.5 per cent unemployment rate seems a distant memory with unemployment peaking at 5.8 per cent in October and falling since then to around 5.3 per cent. Further improvements in employment, which are highly likely, could threaten to push up inflation. There have been some signs that the rate increases to date have had an impact. Consumer confidence has fallen in recent months although it is still holding up at high levels, retail sales have been up and down over recent months with the trend being basically flat for some time and housing finance has also eased back over recent months. The increases in interest rates have occurred following the passing of Government stimulus measures such as cash payments and first home buyer boost. Taken together these things seem to be having a dampening affect on some sectors of the economy.

Despite these indications the RBA has identified another source of concern that is adding to its view that interest rates need to be raised back to more historically normal levels. Australian house prices have been rising strongly over the past year and particularly in very recent months. The expectation is that they will continue to. This is due to a fundamental imbalance between demand and supply. Not enough houses are being built to satisfy the needs of the growing population, especially given the current high immigration numbers. Whilst the RBA is mainly tasked to target monetary policy to ensure low inflation and full employment it has increasingly made reference to the need to avoid a bubble in home prices. The RBA Governor, Glenn Stevens even took this message onto breakfast television recently. This is now clearly part of the monthly deliberations and another reason why the direction of interest rates is clear.


ING DIRECT began operating in Australia in 1999. By doing business online, over the phone and through intermediaries, ING DIRECT keeps it overheads low and passes the savings onto customers in the form of competitive rates. Today, it has grown to become Australia’s fifth largest retail bank, with $21 billion in deposits, more than $37 billion in loans and around 1.4 million customers.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



Where are interest rates going in 2010?

Wednesday, March 03, 2010

There is little doubt that interest rates are still on an upward path over 2010. The Reserve Bank of Australia (RBA) delivered the latest interest rate increase instalment after its Board meeting on 2 March to take the cash rate up by another 0.25 per cent to four per cent. The RBA has made it quite clear on a number of occasions that the ‘emergency’ interest rate settings during the global financial crisis have done their job and that it wants to move interest rates back to more normal levels. The latest move combined with the three increases of 0.25 per cent in the final months of 2009 has added one per cent to official cash rate so far in this tightening cycle. At the last meeting in February the RBA left the cash rate unchanged. This initially surprised the market and raised some doubts about the RBA’s monetary policy intentions. So what does the future now hold and where will rates end up in 2010?

The RBA indicated after the February meeting that it paused from increasing rates to review the effect of its earlier actions and to evaluate developments in the global economy. Globally there has been a great deal of concern about the debt levels of some countries, with Europe and Greece in particular under scrutiny. The potential for debt default and the longer-term effect of the need to wind back fiscal stimulus has placed a cloud over the rising optimism regarding global growth forecasts. Additionally, recent data coming out of the US. has indicated that economic recovery there is evolving slowly and this too will continue to cause a drag on the global outlook.

Undoubtedly this renewed global uncertainty added to the caution exhibited by the RBA. It was never expected that rates would be adjusted every month but understanding when the RBA would take a break from regular monthly monetary policy tightening was complicated by the strength evidenced in the local economy.

Australia has performed exceptionally well, especially by comparison to the major industrialised nations which have all fallen into recession in recent history. With China growing strongly and having a strong influence on the Asian region, Australia has been a major beneficiary through strong export performance. Additionally, the combination of government stimulus in its many forms and low interest rates has boosted domestic activity.

An evaluation of Australia’s performance includes:
  • A sharp rise in consumer sentiment over recent months and a return to the higher levels that prevailed prior to the global financial crisis
  • A strong performance in retail sales which again lifted strongly in January
  • Exceptionally strong employment growth with the unemployment rate peaking in late 2009 at 5.8 per cent and falling back to 5.3 per cent in January 2010.

The end of some elements of stimulus had seen moderation in some areas of the economy. For example, the end of cash bonuses and more recently the first home owner boost coupled with the RBA action to raise interest rates had seen the edge come off sentiment resulting in a slowing in retail sales in December and reduced housing finance approvals. The softer data probably added to the RBA’s decision to pause in February. More recent readings on the economy indicate further strengthening and accordingly, the RBA has resumed its action to raise interest rates.

In the longer run, the RBA is committed to moving interest rates up to typically normal levels. Historically normal levels have seen the official cash rate at approximately five to six per cent. Now, however, the RBA is more focussed on the rates borrowers pay. Given that banks have generally increased lending rates over time by more than the official rate movement, the neutral level for the cash rate is seen as being lower. It looks like the cash rate will probably be increased to around 4.75 per cent by the end of 2010. This will place standard variable home loan rates at 7.5 per cent to 7.75 per cent. A move up to these levels will only necessitate adjustments to the official cash rate of 0.75 per cent over the balance of 2010. The RBA is therefore likely to leave rates on hold for about six of the nine monthly meetings remaining this year, adding 0.25 per cent at each of the other meetings. An orderly progression would suggest increases every three months from now.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



How the 2009 financial crisis will affect 2010

Thursday, February 04, 2010

While Australians seem to have escaped the ravages of the global financial crisis, they will experience a lasting hangover during 2010.

The scramble for funding around the globe is continuing to put pressure on the cost of money and the Reserve Bank in Australia looks likely to continue increase the cash rate back to a more neutral setting, around five per cent.

On the upside, Australians will continue to secure high rates for their savings as banks compete for local funds.

The downside will see mortgage rates rise by more than one per cent.

The tightening of monetary policy with likely see progressive 0.25 per cent moves of the cash rate until it reaches around fiver per cent by the end of 2010.

Last year, the Australian economy put in a remarkable performance by defying recession and producing better growth than any of the major industrialised nations.

The Global Financial Crisis had been expected to have a heavier impact than it did.

Government spending and record low interest rates acted to cushion the effect of a global economic downturn and kept the Australian economy on track.

As the performance of the economy improved, both business and consumer confidence recovered. This in turn had a positive effect on investment and spending.

Housing finance and house prices also grew soundly.

This year rising interest rates will temper the recovery. The increasing interest rates will also put pressure on personal savings. The latest ING DIRECT saving census has revealed almost one in five Australian’s (18 per cent) have less than $1000 in the bank.

Other results show 40 per cent of males have $5000 or more in the bank, while almost 20 of females don’t know how much they have in the bank. The Saving Census also found over a quarter of those who earn under $40,000 are pessimistic about the future whilst only 10 per cent of those who earn over $70,000 are pessimistic.

In an attempt to keep debt under wraps, Australian families are turning to cash and the use of debit cards. The Savings Census revealed more than a quarter of Australians will spend less on credit cards in 2010 and only six per cent have said they will spend more on credit cards in 2010.

The results of this census show the downturn has affected people in different ways; 2010 is going to be a real test for Australians and how they mange their money.

For some households the money is running out with four in ten (40 per cent) Australians saving less than they were five months ago or not saving any money at all (21 per cent).

This is particularly so for low income families where 56 per cent are saving less or not at all (33 per cent).

With the current cash rate at 3.75 per cent, a move up to five per cent will flow through to higher mortgage and savings rates, putting pressure on many Australian families. 


About ING DIRECT: ING DIRECT began operating in Australia in 1999. By doing business online, over the phone and through intermediaries, ING DIRECT keeps it overheads low and passes the savings onto customers in the form of competitive rates. Today, it has grown to become Australia’s fifth largest retail bank, with around $22 billion in deposits, more than $36 billion in mortgages and more than 1.45 million customers.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.