My Interest Rate Rant

My Interest Rate Rant

Back before the Reserve Bank of Australia (RBA) met last November to decide on what to do with interest rates I wrote an article with my reasons why a cut in the official cash rate from 2 percent to 1.75 percent was the right decision for them to make.

I predicted that they would, because there was a compelling argument to do so and no reason (within their charter) to leave them on hold.

I also went on to say that 'my disclaimer' was they had stuffed up their decisions on many previous occassions, showing themselves to be 'trigger happy in putting them up, while dragging the chain and ever so slow at lowering them when conditions called for that, so while a rate cut was warrented, it was not assured.

If you have been reading my newsletters for a while you would be very aware of my strong disagreements with RBA interest rate decisions, each time vindicated when they eventually do what they should have done sooner.

Well guess what, the tide is turning.

That was then

On October 8 2015, David Scutt published an article in Business Insider that was titled 'CBA: Australian inflation is likely to accelerate, reducing the odds of more rate cuts'

In his article, Scott outlined the reasons given by Gareth Aird, the senior economist at the Commonwealth Bank of Australia (CBA), why the Australian inflation was likely to accelerate and see the RBA leave interest rates on hold, at 2 percent.

Gareth Aird said benign inflationary conditions were unlikely to persist in the coming quarters and suggested that an expected lift in the inflation rate would likely have implications for future monetary policy.

He went on to say; “Our forecasts have headline inflation lifting from 1.5%pa in Q2 2015 to near the top of the RBA’s target band (2.8%pa) by Q1 2016. Underlying inflation is also forecast to step up.

“From a monetary policy perspective our views on inflation certainly don’t necessitate any policy tightening. But they do suggest that there may be less wriggle room to cut rates further.

“We see the risks of near term rate cut as low and have the RBA on hold at 2.0%.”

Melbourne Cup Day 2015 | The RBA Decides

Well on the first Tuesday of November last, Melbourne Cup Day, the RBA met and decided to keep official interest rates on hold for another month.

This meant the predictions of Gareth Aird from CBA were right and mine were wrong.

The following week I wrote another article stating that I disagreed with the decision of the RBA.

Six months On

Two days ago, on April 27 2016, David Scutt again wrote an article for Business Insider that was headlined "Deflation Comes to Australia

The article went on to say: "Australian consumer price inflation (CPI) has come in well below expectations for the March quarter, opening the door to a potential rate cut from the RBA next week.

Headline inflation fell by 0.2% for the quarter, leaving the annual increase at just 1.3%. Not only was the quarterly decline the largest since the December quarter 2008, it left the annual increase at the lowest level since the June quarter 2012."

Erronious Predictions

We have (and will again) make incorrect predictions, that's a given and not my point.

I guess what I am doing is exposing a pattern that I have watched repeat itself for the best part of a decade, where 

The RBA has control of monerty policy, not to run the economy, but to keep inflation within a 2 to 3 percent range. Whenever inflations looks as though it MIGHT get to the high 2's, the RBA is trigger happy and quickly raises rates to curb spending and keep inflation in check.

But when the reverse conditions are present, the RBA holds off and holds off and holds off cutting rates, i.e. when inflation is obviously low and we need to stimulate spending.

The inflation rate in Australia has been below 2.5 percent for all of 2015 and 2016, so far. 3 percent is the ceiling and we just read that for the last year it has been 1.3%; officially below the 2 percent floor. So again I say that next Tuesday when the RBA meets they have but only one decision to make - to cut interest rates to 1.75 percent. If they fail to do that then they are failing to do their job.

I stand by what I wrote six months ago and I stand by my claims that they got their decision wrong. You can read what I wrote then... below.

If you have a home loan and/or investment property loans, now is a great time to speak with us about getting you a better rate.

We have about 60 files on the go at the moment and, in most cases, saving people a lot of money on their mortgage repayments due to the great rates we can source. For example, we are able to secure some investors a 2.5 percent interest rate on their home loan; there are also some great fixed loan products around.

Interested to see if we can save you money

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What I wrote last November go >>>here

Partnering with you for your investment success,

Nick Lockhart