Are low interest rates working?- Pete Wargent

The job of a central bank, in the words of the famous old quote, is to “take away the punch bowl just when the party gets going”.

In other words, the bank wants to promote a healthy, growing economy and steer the economy away from recession, but not to allow the economy to overheat.

With the Aussie economy slowing in recent times, interest rates have been cut repeatedly from 4.75% to a record low of 2.75% in a bid to stimulate the economy.

chart-pack_Страница_22

A lower cash rate as set by the RBA should theoretically lead to a faster-growing economy (and eventually, possibly higher levels of inflation) because saving will become less attractive, and borrowing and spending become more appealing.

So is the lower cash rate working?

 

Saving ration since the GFC

It’s quite clear that since the global financial crisis, Aussies have been saving more and risk-aversion has been the order of the day.

In theory, the household saving ratio might now begin to fall as yields on bank accounts and term deposits are so low that they are now inferior to dividend yields on many stocks.

The effect on share market indices is clear – check out the run-up in financial stock valuations below.

Other sectors have also been fired up and investors shun bank accounts and deposits in search of yield.

Resources stocks have been weak in contrast, as commodity prices have tanked.

 


Consumer spending?

Retail sales are showing promising signs, but we’ll need to see a few more months of solid results here before we get more comfortable.

chart-pack_Страница_09

 

Household debt

Tapering, and that’s good, because we don’t want household debt to increase further from the current levels.

chart-pack_Страница_10

 

Dwelling prices

Moving up fairly strongly since May 2012, but on a national level, they remain below where they were in 2010.

The RBA seems to be very comfortable at this stage, but the Perth and Sydney property markets seem to be heating up which will have been duly noted.

dwelling prices

 

Business credit

Remains very soft at just 0.3% growth in the last reported months.

This is very disappointing and much work still to be done here.

The RBA may need to cut rates again to just 2.50% to get the domestic economy moving.

chart-pack_Страница_11

 

Dwelling approvals and construction

Residential building is up, but nowhere near enough to plug the gap left by the massive mining construction boom. This is a key reason that we are likely to see another interest rate cut.

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There is some light at the end of the tunnel, potentially, as dwelling units approvals have increased very substantially over the past 12 months (more than 27% on a seasonally adjusted basis).

Australia needs the approvals to translate into actual construction. Here’s dwelling units approved:
BA5

Private sector houses approvals also up, although more steadily:chart-pack_Страница_12

 

Source: ABS

 

Unemployment

Number of employed persons is increasing, which has been great to see:

chart-pack_Страница_15

Unemployment numbers reported have been all over the place, in fairness, but figures look likely to run higher than the present unemployment rate of 5.5% as the labour-intensive mining construction boom unwinds, and the trend is moderately up since 2012.

chart-pack_Страница_15

Source: ABS

 

Summary

Well, it depends on whether you’re glass is half empty or half full.

I see lots of promising signs but much work to be done, with the RBA retaining the ammunition to cut rates further as required. Others note a slowing economy and see risk, risk and more risk.

Commodity prices have fallen which is a real concern:

 

On the plus side of the ledger, the Aussie dollar has tumbled dramatically against the greenback in to the 91 cent range:

Inflation remains benign and comfortable within the RBA’s 2-3% target range, so it looks likely to me that we will see another rate cut in the net few months which should begin to fire up the economy.

I remain an optimist at this juncture.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Are low interest rates working?- Pete Wargent' have 1 comment

  1. July 11, 2013 @ 3:03 pm Jessie Hall

    I love it that you’re an optimist Pete… I think there is evidence to support either sides of the debate over the direction of our economy, so it’s good to read your positivity.
    I also think (although some people will disagree with me) that it’s fantastic that “Aussies have been saving more”. Borrowing for investment (good debt) is fantastic, but obtaining credit card after credit card to buy things we don’t need is ridiculous – bring back the days where if you wanted something you bought it in cash. Leave the debt for income producing/wealth creation pursuits :)

    Reply


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