The RBA will most likely leave the cash rate on hold at 2.75 per cent on Tuesday.
Rates should fall another 0.25 per cent next week – as discussed as few weeks back – to make up for the federal ‘fiscal drag’.
Where Aussie interest rates go from there will depend on the direction of the Australian dollar & the amount of new housing construction.
Our economic outlook is weaker
A high Australian dollar makes it harder for industries like manufacturing, tourism, construction & retail to be competitive.
Despite the fundamentals for housing being sound – low & falling interest rates; now pent-up housing demand; strong & increasing population growth & steady unemployment – new housing starts & new home sales continue to remain weak.
As a result, the outlook for the Australian economy has lessened, with financial services firm JP Morgan downgrading their earlier forecasts of 3.25 per cent economic growth in 2014, to 2.75 per cent next year.
This should force the RBA to cut the cash rate below 2.5 per cent.
At present the non-mining private sector continues to remain on the investment sidelines; & it is very much needed to help fill the void left by the ‘pullback’ in mining investment.
Note ‘pullback’ & not ‘crash’ or ‘collapse’ – but more on that in coming weeks.
I don’t expect any great investment commitments this side of 14th September & for many months after that, to be honest.
Confidence should improve post federal election, but by then we will be running into Christmas & besides…things, economically speaking, don’t happen that quickly.
On a positive note – unless you are a builder – the RBA has little to fear from cost pressures (outside of union action) in the construction sector as building costs fell at their fastest pace in nearly four years during the March quarter. On an annualised basis, building costs have been growing by just 2 per cent, which is more than half the decade average growth rate.
New housing construction has a huge multiplier effect across the economy. It creates lots of jobs.
New housing starts must be stimulated.
Our current political crop doesn’t have the gonads to change the way property is taxed in Australia. And we don’t have the money in the coffers anymore to take the easy route and cut property taxes such as stamp duties.
I do note, however, we have a spare $80 million to give Bill Gates. Now, I am all for having a world without Polio, but surely this type of donation should be coming from the likes of Clive Palmer & other billionaires first. But I digress.
What’s ahead for interest rates
The latest Bloomberg survey has 10 out of 21 economists forecasting a cash rate of 2.5 per cent by the end of this year, with Westpac tipping a cash rate of 2.25 per cent & the remainder anticipating no further rate cuts this calendar year. At the time of writing, only two economists expect a rate cut in June.
I think the cash rate rate could go as low as 2 per cent by the end of this year. The baton change from engineering to residential construction is taking much longer than anticipated. If the Aussie dollar climbs again against the greenback, then all the more reason for a 2 per cent cash rate.
Given the current state of play, the only lever we have to pull is interest rates. I think interest rates should fall on Tuesday & then again in August – bugger the timing of the election – and then once more in November this year.
We need to set up 2014 to be a massive year for change down under.
Enjoy your Weekend.
This Matusik Missive, like all of them, is commentary & not advice. Readers should seek their own professional advice on the subject being discussed.
Michael is the director of independent property advisory Matusik Property Insights and writes the Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.