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RBA holds: but some upside

September 6, 2019

The Australian economy remains resilient in the face of global headwinds as the Reserve Bank held interest rates steady for the second month in a row. The news is full of ominous warnings – is danger as close as the headlines suggest?

Low interest rates – the upside

The Reserve Bank of Australia (RBA) left rates unchanged at 1% in its September meeting, and that is good news for business, consumers and mortgage holders.

Businesses’ ability to service debt cheaply has led to healthier bottom lines and a boost in profitability. Interest rates are also taking a much smaller slice from consumers’ pay packets. Coupled with the recent tax cuts, there’s plenty of encouragement for shoppers to open their wallets.

On the home front, mortgage holders continue to benefit from lower interest rates. Also, in Sydney and Melbourne at least, it looks like the property slump has bottomed out.

The Australian economy

While the headline GDP figure might dominate the news cycle, in September the government reported strong nominal GDP growth of 1.2% for the quarter or 5.3% for the year. The figure is significant because it reports how much income the Aussie economy earns, rather than how much it produces.

That’s good news, bolstering company profits and the government’s tax take. There are even hints that as a result, the government could reach its much sought-after budget surplus ahead of schedule.

There is little doubt that consumer confidence is on a ‘wait and see’ setting, but with the September retail figures still to be released, we may yet see the government’s July tax cut flow through to the tills. Certainly, Super Retail Auto and JB Hi-Fi are reporting promising post-July numbers.

The lower exchange rate is also boosting Australia’s trade surplus. Higher iron ore prices have meant that Australia’s trade surplus is at a 40-year high. That’s great news for exporters.

A greater focus on productivity

In recent times, RBA Governor Phillip Lowe has been asking the government for fiscal stimulus. ‘Holes and houses’ can only take the economy so far and in a major speech last month, Treasurer Josh Frydenberg suggested that the government would switch its focus to productivity.

That is, the government is encouraging firms to adapt to changing demographics, work practices and technology to lift national income; no longer should the record mining boom could be relied on to continue to deliver the luck.

It has also committed to infrastructure projects such as Sydney’s second airport, an airport rail link in Melbourne and a $9.3 billion freight rail link between Brisbane and Melbourne.

Where to from here?

There is a near-universal consensus among economists that the interest rate tightening has not yet completed its cycle. Markets are pricing in another two cuts to provide some underlying support to the economy. All eyes are on the September retail figures – and hoping they’ll be trending in the right direction.

In the meantime, now is still a great time to get finance for a business expansion, asset refresh or other purchases. Money has never been cheaper, and with interest rates hovering just above zero, there’s no reason to wait.

Now is still a great time to get finance for a business expansion, asset refresh or other purchases. Money has never been cheaper, and with interest rates hovering just above zero, there’s no reason to wait.