State of Play: RBA Monetary Policy Decision

Dominique Grubisa
Dominique Grubisa

Published 4:45 am 29 Jan 2021

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Hi there and welcome to our State of Play. So we had the much anticipated Reserve Bank interest rate decision announced today, and they left rates on hold. So interest rates now officially are set by the reserve bank at 0.25%. Still the lowest we’ve ever had, but a lot of economists predicted that we’d see a rate drop today. The reason that they thought that, in spite of the fact that Phillip Lowe, the governor of the Reserve Bank had said we’re never going to zero rates in Australia. We’ll sit at 0.25%, but people said that they would drop them further because of what was happening in the economy, what was happening in the wider global economy, and that they needed some stimulus on the jaws of life on the Australian economy.

So let’s backtrack a bit, interest rates are the price of money. They’re the reward that savers get and they’re the cost that we spend for borrowing. So interest rates, the price of money dictate what happens in an economy. It’s one of the tools that they use to manipulate or to control the economy. So if things are getting really, really expensive, we’ve got high inflation, everyone’s rich, everyone’s spending, and they want to avoid that roller coaster ride of boom and bust because we used to have that. We used to have really, really big booms followed by recessions. And in Australia, we haven’t had a recession for 30 years. So they managed to even it out by using, amongst other things, monetary policy. So if they’ve manipulated interest rates, it could stop people borrowing or encourage people to spend. So if the economy was way too hot and we were booming and they wanted to stop it from busting and just crashing and burning, they would raise interest rates. Really, really high rates mean that people get rewarded for saving.

So they say, “Look, I’m not going to spend, I’m going to stick it in the bank because I can get 8% in a term deposit.” And then they might say, “I’m not going to borrow because interest rates are too expensive.” “I can’t afford, for example, the repayments on a loan. So I won’t borrow, the cost of money is too high.” We’ve got the reverse at the moment. They want us to go out and spend. So they’ve cut interest rates to as low as possible. And the Reserve Bank has said, “We can’t go to negative rates in Australia. We can’t have 0% free money because we need people to save. And it’s a blunt tool.” You get to a point where the banks won’t pass on the interest rate cuts, they’ve of no benefit to anyone so we’ll use other means. And the other means that governments have to control the economy is government spending.

So we’ve thrown everything at the Corona virus. We’ve had interest rates just chop down to nothing, next to nothing, 0.25%. We’ve had government stimulus packages, but still we’re not seeing the growth that they would have wanted. Now, it’s such early days, we weren’t even meant to be out of lockdown yet, and there are shoots of life. But what has happened is we’ve taken the express elevator to the basement in terms of massive job losses, businesses really suffering. So Australian Bureau of Statistics figures show that 70% of businesses have been negatively impacted by Corona virus. And they’ve been forced, seven out of 10 businesses have been forced to change the way they operate. And in pivoting and changing they’ve incurred losses, they’ve had to, instead of laying off staff they’ve accessed JobKeeper. So three quarters of businesses, 75% of businesses in Australia have taken a government handout or stimulus package in the form of JobKeeper or JobSeeker, or 38% have used other government measures like government loans. So that is all going to run out in September of this year.

So the economist or many of those polls thought that the Reserve Bank, who announce their interest rate policy on the first Tuesday of every month, may get in first and lower rates to really… It’s like the defibrillators that they use to start someone’s heart. Same thing, they thought they might shock the economy back into life or try to. So they have a media release when they make their announcement. So the board of the reserve bank met today at 2:30 and the governor of the Reserve Bank, Phillip Lowe said, because of what’s happening, he said the global economy is in a severe downturn. So a lot of countries have just gone into free-fall economically to try and contain Corona virus. So lots of people have lost their jobs globally. So sharp rise in unemployment, worse in other countries and in Australia.

And even though from a health point of view over recent weeks, we’ve seen that the infection rates have declined and there’s restrictions, and countries are starting to come back to life. They’ve said they need monetary policy and fiscal policy support globally. So governments have to get in and restart economies by spending money themselves, building roads, giving handouts and grants and federal reserve banks have to lower interest rates. So what he said that the reserve bank is doing in Australia was they’re not going to lower rates further. Phillip Lowe said, “Well, we’ve already pumped $50 billion into the economy by buying government bonds.” So taking home, buying government debt in exchange for money getting pumped into the country. The other thing that they’ve done is, so that’s to help inflation, to make us all spend more and that will help wages grow.

The other thing that they’ve done is they’ve lent money to banks. So they’ve given banks $6 billion to lend out to people at really, really low rates, especially businesses so that the economy can start pumping again. But that’s the limit of it. They’re not lowering official interest rates further.

So what Phillip Lowe said was the Australian economy is going through a very difficult period and is experiencing the biggest economic contraction since the 1930s. So since the great depression, extreme language from the Reserve Bank governor. So they don’t normally speak that way. And he’s trying to say to people that we need to be forewarned, forearmed and not get complacent. So he said in April, the total hours work, so people working in jobs dropped by 9%, and more than 600,000 people lost their jobs in that month alone. Many more people not working at all, working zero hours, but still considered as employed, so a jobkeeper. Household spending weakened, considerably, and people in deferred investment or canceled it altogether.

So if they got to buy a new vehicle for work, or if they were going to buy a new house or whatever, they decided to just wait and see. So uncertainty means people don’t spend, which means the whole economy contracts. There’s less jobs, it feeds upon itself. But he did say that the outlook, he did say we’re back into action faster than we thought possible. And people are starting to spend a little bit so retail figures have gone up. But he said the outlook, including the nature and the speed of the effected recovery is still very uncertain. The pandemic is likely to have long lasting effect. So nothing’s changed, they’re still talking years to recover, not weeks or months and that’ll affect the economy in the longer term. In the period immediately ahead, much will depend on the confidence that people and businesses have about the pandemic itself, the health situation and the economy and their own finances.

So Roosevelt said at best, in the great depression, we have nothing to fear, but fear itself. So what Phillip Lowe is effectively saying, it’s really, we can give the tools, we can lower interest rates, we can pump money into the economy at a fiscal level, but it’s really up to consumers to feel good, to overcome the uncertainty and to start spending. So he says the substantial coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period. It is likely that the fiscal and monetary support will be required for some time. Then he went on to say, “I don’t foresee rates rising for a considerable period of time.” He didn’t mention dropping them further, but he did mention that the bank is poised to do whatever it takes, including more pumping of liquidity. So quantitative easing printing of money, basically to pump it into the economy so that we can all access it and stay afloat.

So the big takeaway from this is that we are treading water, and we’ve got the government and we’ve got the Reserve Bank ready to support us with probably unprecedented action, because we’ve just never been in a situation like this. We’ve had recessions before, but in Australia, not since the early nineties. So nearly 30 years since we’ve had a recession and we’re just not equipped to deal with it, in that a generation has come and gone without a recession. And this is unlike other recessions that have come from economic activity or economic consequences. This was a forced or mandated closing of an economy. So usually unemployment will happen over a period of months or years, unemployment will escalate, you’ll slide into a recession. We just catapulted down into the joblessness in the space of weeks. And it’s still going to take time to climb out of that and get the jobs back and get the economy working.

What does that mean for the property market? Well, economists and property experts are weighing in on that. So Shane Oliver of AMP Capital has said there’ll be a five to 10% fall in property prices. He said it could have been a lot worse without government stimulus. It could have been 20 to 30%. But banks, the Australian Banking Association, Anna Bligh leading them, has come in and said, “We will help ordinary people, moms and dads with their loans. We’ll give them holidays and freezes on their loans.” Similar thing has happened also with businesses. So banks are helping people, giving them breathing space. The real test will come in September when all of that ends. So there’s $20,000, they’re talking about government grants now, to support the construction industry. So people will get grants if they buy a brand new house and land package so that builders and construction experts, people in that industry, will have jobs because that’s the backbone of the economy.

But Shane Oliver says that could actually make things worse for the housing industry. Some people are saying, “Don’t worry about new builds, just allow it for renovations and people doing up houses to sell, give people grants, just to buy property.” So funny time for properties, the reason that Shane Oliver says that it will get worse is because, with borders closed the way they are, for the foreseeable future, we are not having immigration to Australia. And immigration accounts for 50%. So half of our population growth comes from immigration, not waiting for the birth rates and not waiting for people born last year to grow up and buy properties in 20 years time, what they’re talking about is people coming into the country, especially skilled migrants and buying a property. So if we don’t have that demand, increasing the supply by encouraging new construction is just going to mean there’s a surplus. Supply and demand, if there’s too much of something, then prices are going to fall.

The other thing that may cause prices to fall, of course, is people who’ve lost their jobs, 600,000 jobs lost, people who are not earning, high unemployment affects property markets. Because people who aren’t earning with very high debt levels can’t pay their mortgages, and if they default on their mortgages, which at the moment they’re not because they’ve got a holiday for six months. And also the government have made laws to stop bankruptcies and liquidations for six months. So we’re still in a state of freezing economically, even though we’re coming out of lockdown. We’re still in very much the calm before the storm. So other banks and economists at those leading banks, and as you can imagine, the biggest market in those banks is mortgages on residential real estate, so they watch that space like a hawk.

So Westpac and Commonwealth Bank have both predicted a 10% decline in property prices. What we have seen though, and core logic data released has said that we’ve seen it just in recent weeks, since lockdown has ended and these restrictions has lifted, we’ve seen 18 and a half percent increase in sales activity. So what happened when we went into lockdown and you couldn’t have open for inspections or anything, sellers pulled their properties from auctions, buyers were not out and about, the whole market just froze. Now, people who are worried, especially investors, because they’re not getting yield, they’re not seeing capital growth, they’re seeing the end of a boom market so they’re not going to wait for that to happen. They’re just selling now. So to have 18 and a half percent increase in a matter of two weeks after 33% decline in April in volume transactions, properties being sold, is a big deal.

Louis Christopher of SQM, another housing commentator, says there’s a pretty big dividing gap at the moment between buyers and sellers. So buyers are looking for bargain, sellers are not ready to drop prices yet. So again, a calm before the storm. Supply and demand is going to dictate what happens. Joblessness, people who don’t have money and can’t afford their payments are going to have to, unfortunately, come September, meet the market. Unless other laws change and there’s further stimulus or there’s further freezing of repayments or mortgages or insolvencies, people will have to have a day of reckoning that’s looking like it’s coming in September. So there’s a current standoff because laws and banks, and everyone’s protecting people in distress, but that distress is going to flow through the economy because of immigration just stopping with borders closed and people just losing their jobs. Currently not feeling the pain because of JobKeeper, but that will end come September.

So there will be a day of reckoning. We can see the sharpest ever, since records were kept, we can see how just in the month of, well, in this quarter alone, we’ve had unemployment drop, 600,000 jobs lost. So never had that. We can see jobs going up and down, but just within margins of a hundred thousand. So unprecedented joblessness will start to flow through the figures in the economy. In fact, it’s already happening. When we look back at May’s figures just released from CoreLogic, we can see that just for the month property prices have started to fall. So it’s a tipping point now and obviously it’s people are holding on and not selling because they’re not feeling the pain, but that in the coming months, that’s going to end. So prices are already coming off the boil, down 0.4% in Sydney, 0.9% in Melbourne and so on across the board there.

Median values still holding firm. In fact, Tim Lawless, head analyst of CoreLogic has said, “Well, considering what’s happened in the economy and the pandemic, half a percent fall, or a little bit less across the board nationally in housing values of a month shows that we’re pretty resilient. Our property market hasn’t fallen that far yet.” So with restrictive policies now easing, then maybe we won’t have the downward fall as predicted. So Tim Lawless predicted 10% drop. What he has said though, balancing that out, is he said, “Well, hang on a minute, the other thing that we have to consider is that obviously JobKeeper, JobSeeker, bank freezers on loans, insolvency freezers, all these stimulus in the economy, quantitative easing, printing money from the reserve bank that has to end, and how long can we keep things, including property owners with too much debt and no income, how long can they stay on life support with no immigration? So falling or waning demand in the market.

So there’s a rising tide of distress there. And property prices are going to follow. At least 10% would seem to be the prediction. Some are predicting a lot more. I think the general consensus from Philip Lowe and the Reserve Bank announcement is that it’s too early to tell. Now Glenn Stevens was the former governor of the Reserve Bank. So he was acting governor from 2006 to 2016. And when he retired, Phillip Lowe took over. So Phillip Lowe is formerly governor, everything he says is scrutinized, but Glenn Stevens has recently come out, in an interview he said, “Well, yes, probably housing prices will fall. It’ll all depend on unemployment and immigration. We may have a soft landing.” But he said, “Because so many people own property in Australia, a lot of our wealth is tethered to the value of our properties, then the government is going to want to support the housing market.”

And that’s what they’re looking at now, with that excess from the jobkeeper, they’re saying, “Okay, where can we direct this into the economy?” One of the backbones of our economy that could use some stimulus is tourism, because of the fallout from COVID-19. And they’ve said the other area is the housing market. So they’re looking at stimulus packages. And one of the things on the table that they’re talking about is a $20,000 grant to support the construction industry so that developers will still roll out housing. Either way though, prices will fall because of lack of demand and because of historically high debt. Because we haven’t had a recession in 30 years, our housing market hasn’t really gone down more. It’s just slowly risen over time, prices going up and up and up. And there may be some adjustment.

Now, most people will rise and fall with the market, but now is the time strategically, if you’re wanting to get into bricks and mortar, to have a strategy around it. And I’ll be holding a special briefing tonight to talk more about that, about the rising tide of distressed properties and how you can buy under market distressed properties in Australia for between 10 to 40% below market value, without finance. And often if you’re flipping for cashflow and buying and selling in the same market without having to pay stamp duty or capital gains tax, or even get a loan. So if you haven’t heard of that before and want to know more around those strategies, you can register at the link that I’ve left there in the comment section and tune in for that briefing tonight. Please follow us on Facebook, where you can get regular updates.

And I’ve just shared what’s happening with the COVID economy, any developments, where opportunities are, where risks are so that you can guard against the downside in uncertain times. So also please share that with friends and family, spread the knowledge, just tag them in the comment section. And of course, if you’re watching this on YouTube, don’t forget to like and subscribe and hit the bell so we can notify you of upcoming sessions and briefings, especially when we go live. In the meantime, we’ll talk on Thursday where I can give you further updates of what’s happening in any developments economically that will affect you in growing and protecting your wealth. So stay safe, take care, and we’ll talk again on Thursday.