When it comes to interest rates, the figure has been on hold for quite some time now.
What the RBA does next is anyone’s guess, and they haven’t given much away since the beginning of the year.
Will rates be lowered to 1%? Will they rise? It’s all dependent on a number of factors, from GDP growth to employment numbers.
And we saw last year, that when the RBA predicts something, growth in particular, they’ve fallen short in their estimations.
Since the GFC, the RBA has remained positive about GDP and inflation. And while Australia survived in a time where many developed nations faced recession, the RBA have overestimated the pressures that underline these factors, in my opinion.
RBA versus results
In the chart below, you can see RBA’s assessment of growth versus what actually happened since last recession in 1990 and the GFC:
And in the chart below, we can see the inaccuracies in their projections for inflation over the same period:
I believe that it is clear that the RBA has overestimated the forecast for CPI and GDP since the GFC.
NAB’s calculations show that Australia’s central bank has overestimated their predictions for growth on average by 0.4 percentage points since the financial crisis.
Its margin for core inflation overestimation is slightly lower, at 0.3 percentage points, throughout the same timeframe.
Changing their tune
Three months ago it seemed as if the RBA’s predictions were on the same path as seen previously, but just this month they lowered their expectations for GDP and core inflation.
These lowered forecasts could make it hard for the central bank to overinflate forecasts in the future. According to Business Insider, if the RBA is to continue to repeat its performance as it has done in the past, it all ‘points to sluggish economic growth and, in all likelihood, higher levels of unemployment this year.’
But it’s not only overinflating their forecasts that the RBA is worried about, the current state of the housing market could be cause for anxiety for the central bank, in my opinion.
In recent commentary, the bank has made it clear that the cash rate direction is dependent upon the unemployment levels.
The RBA’s monetary policy meeting held earlier this month, explains why house prices could soon be added to the list that influences interest rates, as the minutes explained:
‘From a longer-run perspective, members assessed that, following such large increases in housing prices, the effect of the recent price falls on overall economic activity was expected to be relatively small. However, members observed that if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast.’
It seems now that the bank acknowledges that falling house factors could impede on many factors concerning the economy. Such as high unemployment rates, slower economic growth, and inflation returning to the 2–3% mark.
Housing market investment to decline
The bank also acknowledged that ‘dwelling investment was also expected to decline more sharply than previously expected, consistent with the decline in residential building approvals and the fall in housing prices’.
Furthermore, the slowdown in consumption for the September quarter, plus a slowdown in retail sales for the final three months of 2018 could have been a result of a stagnant housing market and reduced market activity.
Therefore the RBA has admitted that the ‘uncertainty about the recent momentum of consumption and factors affecting households’ future consumption decisions remained a key risk for the domestic economic outlook’.
But while the RBA have crackdown on their overhyped forecasts, they are still optimistic that all these factors will not upend the broader economy. They also don’t think that lowering the interest rate is cause of concern right now:
‘Given that further progress in reducing unemployment and lifting inflation was a reasonable expectation, members agreed that there was not a strong case for a near-term adjustment in monetary policy…
‘Rather… it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while further progress unfolds.’
As Business Insider put it:
‘Given the recent trajectory of some Australian economic data, financial markets are clearly not sure that stability is required, nor helping to build confidence, continuing to price in a full 25 basis point rate cut from the RBA by the middle of next year. A small but increasing group of market economists also share this view.’
Upcoming economic data will help establish an idea of where the cash rate is headed.
But given what the RBA had to say in its February minutes, as seen above, the data that is found from housing could play a significant role.
This week in Markets & Money
In Monday’s Markets & Money, Selva explains the anxiety drivers can go through when driving and they’re low on petrol. You stress and stress until you finally find a petrol station. When it comes to electric vehicle drivers, they experience something similar. It’s called ‘range anxiety’. This could be even worse than not knowing where the next petrol station is. While you’re almost guaranteed to stumble across one, the infrastructure for EVs is minimal for now. But the good news is, charging stations can be installed nearly anywhere. Selva tells readers to stay tuned, as this is a developing story.
In Tuesday’s Markets & Money, Selva looks into the latest in cryptocurrency. Many financial intuitions have lamented over cryptos, especially the likes of bitcoin. The fact that there are no regulations and that they are decentralised currencies, doesn’t sit well with governments and banks. While they are beginning to open up to the idea of blockchain technology, it’s is still a tad taboo. However, one bank has offered up their own coin! JP Morgan has established the JPM coin for large cross-border payments for large clients. There’s just one catch, it’s a private coin only available to their clients. While banks might not be ready to jump onto the crypto bandwagon, they are starting to invest in blockchain technology.
On Wednesday, Selva discussed the current state of cybersecurity. All around the world there are schools specifically set up for cyber security. From Israel to China. This is due to the very real threat of the current and undeclared cyber war happening right now. Attacks are on the rise from cyber hackers wanting to access personal data, especially through phones. That’s why Selva believes that the cybersecurity industry will boom in 2019.
In Thursday’s Markets & Money, Selva discusses the current US debt problem. They are roughly US$22 trillion in debt. And some have come up with a plan. On change.org, there is a petition for Canada to buy the US state of Montana that borders the Canadian border, for US$1 trillion. Over 11,000 people have signed the petition. But that’s not going to solve the US debt crisis. The issue is that the government control the printing press, therefore they are not limited to the amount of gold they have. Therefore they can continue to run up their debt. But with higher debt comes higher interest repayments, which could eventually catch up to them.
In Friday’s Markets & Money, Selva discusses the idea of internal combustion engine (ICE) vehicles. China plans to end these vehicles production by 2040. The UK and France are also looking to end their production of ICE vehicles. In China, EVs are quite popular, three-times higher in sales than the US. Change is coming as governments, consumers and EV manufacturers incentives start to align.
Editor, Markets & Money