The Reserve Bank of Australia has fired its first warning shot and as investors, we need to take notice.
This week the RBA announced its decision to drop interest rates to the historic low of just 1.75%.
The major banks instantly passed on the full cut of 0.25% (except for ANZ, who reduced their rates by only 0.19%) and mortgage holders are cheering, naturally. But we really need to understand what’s going on behind the scenes in our economy before we get too excited here.
You see, the RBA are worried about the possibility of moving into a deflationary position. Globally, economies are contracting and they don’t want to see the same thing happening here.
The cynic in me actually thinks it’s a case of ‘too little too late’. The recession is coming.
We’re already seeing evidence of this – in late April, economic indicators for the first quarter of 2016 were released. The Australian Bureau of Statistics announced that the consumer price index (CPI) had contracted 0.2% in the three months to March.
This is the first time the economy has contracted in 7 years – since the GFC!
Now, the Reserve Bank is planning ahead by dropping interest rates as they’re trying to stimulate the economy. Retail spending has been down and the hope is that when everyday Australians have a little more cash in their pocket, thanks to a lower mortgage, they might start spending more freely.
The Prime Minister’s Budget announcement echoes the same concerns. Their decision to reduce the company tax rate to 27.5% (down from 30%) is a Budgetary measure designed to stimulate the economy and reduce the deficit.
But there is another issue that needs to be addressed, and it’s not quite as straightforward.
There has been so much bad media around the housing industry in the last 6 months or so. But let’s be clear – the housing industry is the largest industry in this country.
All of this political argy bargy about negative gearing and capital gains tax this year is scaring people off. Of course it’s going to go quiet if people are afraid of what the future holds.
Add to this the fact that banks are lifting interest rates left, right and centre following pressure from APRA, and the Reserve Bank almost had no choice but to decrease rates.
I don’t think they’re done, either. They’re trying to stimulate the economy so we don’t go into a deflationary position and one rate cut won’t be enough to achieve that. It’s my view that we’ll likely have another interest rate cut from the RBA this year.
So what does this mean for investors?
Quite a bit, actually – and as always, my position is that knowledge is power. Over the next couple of weeks I’m going to put together a report outlining what investors can expect this year, in terms of where the economy is headed and what investors can do to prepare. Subscribers can look out for the report in their inbox shortly. If you don’t yet subscribe to my newsletter, you can sign up here.
In the meantime? Maybe don’t fix your mortgage rates just yet!
Til next time, happy investing!