May 2016 Interest Rate Decision

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Earlier this week, the quarterly CPI figure was released and it was ground breaking. For the first time since the RBA has made its focus keeping inflation between 2 & 3%, the quarterly figure turned negative. That means, deflation could be upon us but that’s not the point of this discussion.

Rather, our focus is on the RBA’s next move.

Now the first question is “why is inflation so low?” Some simple answers include:
• Low wage growth
• Supermarkets cutting prices to keep market share
• Lower commodity prices – heck I saw diesel priced at $0.99/l only 3 weeks ago (it’s risen since then sadly)

While the $A has in the last 2 months seen a gradual rise back to $0.76US, that’s still not close to those heady days of $1.10US but it is still materially higher. You would normally expect the falling or lower $A to see a rise in the price of imports. Evidence is suggesting that isn’t the case, so far.

So where to from here?

Economists are scrambling to understand what this figure means for our economy. No doubt the RBA has some deep considerations on the cause of this inflation reading and how to respond to ‘re-ignite’ inflation. Their usual tool would be to low interest rates. They’re already at all-time lows but NAB puts the chance of a cut at 55% – that means it’s now become a real possibility.

This is great for those of us with mortgages, but I question how much will actually be passed on. BOQ recently increased their rates out-of-cycle expecting other lenders to follow. They haven’t, yet.

I believe a rate cut becomes a real possibility. It’ll push the $A back down which will continue to help our export and tourism markets. Although I don’t expect the banks to pass it on in full which means there is no real winner (aside from the banks).

It also means there will be 1 big loser – those with term deposits. Rates had increased recently but I expect this news to see those increases reversed and will potentially push them even lower than before, especially if we get a repeat CPI reading net quarter. For those with term deposits it is now well worth looking a little further up the risk curve to achieve better returns on some of that cash. For example, corporate bonds can offer a real alternative as long as you are willing to accept the risk of lending to an ordinary business and not the banks. They can be secured and they can also be tradable on the ASX.

If you want to learn more about how you can increase your cash returns or if you think your home loan interest rate is too high call us on 4613 0311.

 

Author: Nick Rundle
Email: nmr@accession3.com

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