RBA Interest Rate Announcement September 2015

The RBA Interest Rate Announcement today, the RBA decided to leave interest rates unchanged at their September 2015 announcement.

This month the RBA shortened their media release back to a few paragraphs. It seems they have little to say about the Australian economy without sending shivers down the spine of the markets. The statement sounded so much like previous announcements I had to check a couple times that I had the correct date.

Here is the summary:

  • The global economy is expanding at a moderate pace. Same as last month.
  • The U.S. Federal Reserve is set to start increasing its policy rate shortly. Same as last month.
  • Overall global financial conditions remain very accommodative. Same as last month.
  • Australian continues to have moderate expansion with inflation with in target. Same as last month.
  • Credit is growing moderately supported by lower interest rates. Same as last month.
  • Dwelling prices continue to rise in Sydney, however other cities prices are varied. Same as last month.
  • Australian dollar is lower due to declines in key commodity prices. Same as last month.

If you want to read the release yourself, you can see it here http://www.rba.gov.au/media-releases/2015/mr-15-15.html

Basically, nothing new.

I think the RBA is always backward looking and the current need for for another interest rate cut is obvious. Here’s why:

  1. Economic growth will be weak i.e. lower than target, for the next couple of quarters.
  2. We all know that the mining capex slowdown has been offset somewhat by an increase in residential construction but residential construction will slow going forward which will result in weak GDP figures.
  3. The reasons stem from the recent changes in lending under the “guidance” of  APRA (http://www.apra.gov.au/Pages/default.aspx). Banks have made it more difficult for investors to get credit and also increased the cost of getting a loan, anywhere from 0.27%-0.73% . In the last 12 months, there was an increase of $56.1 billion lent to investors versus $45.2 billion to owner occupiers. This means roughly 55% of new loans were to investors. By making it more difficult for investors to obtain credit, a big enough part of the market will be taken out which will put downward pressure on prices but more importantly, reduce the amount of new dwellings being built.
  4. Banks have also made it more difficult for owner occupiers to obtain credit. It is harder and harder for first home buyers to get credit. Lenders have increased their servicing rate (big 4 at a minimum of  7.20%),  decreased the maximum Loan to Value ratios. Again, this just reduces the amount of people buying property and also reduces the amount of new homes being built.

The banking regulator APRA, RBA and the banks needed to do something about the house price appreciation and the risks developing in the housing market but their current implementation won’t work. When growth starts to weaken, what is the RBA going to do? cut the official cash rate. For investors, this means many will be borrowing at an interest rate similar to what they were borrowing at the beginning of the year so for them, no real change.

Disclaimer: This shouldn’t be considered investment advice and is only a general comment that doesn’t take in to account your specific circumstances.