Written by Mark Thomas
1 October, 2019
RBA governor Philip Lowe cut rates to just 0.75 per cent this week citing rising unemployment and weak economic growth.
Credit Growth – Housing, Personal & Business
The RBA cannot affect employment growth directly, but what they can do is affect lending activity by changing the price of money.
As the above chart shows there is a deteriorating picture for all three sectors – Housing, Personal and Business.
The worst of the three is personal credit (red line) which reflects the weak position of the consumer and their reluctance to borrow using credit cards and personal loans.
Housing credit has fallen to its lowest level since 1977 when the RBA started collecting this data (blue line) and business credit growth (green line) has been holding up but looks to be rolling over in a downward direction.
While these credit aggregates are trending this way the RBA will be nervous that the “economy” is not thinking positively and/or expansively. The reluctance of the “economy” to borrow is a major issue for the RBA.
While the short term picture may have turned around in July for First Home Buyer activity this is a very early trend.
Some economists have warned the Reserve Bank risks being “its own worst enemy” by slashing interest rates below 1 per cent for the first time in history and further weakening consumer confidence.
I am astounded to hear such waffle! To suggest that a drop in interest rates will spook consumers is ludicrous. People react to price changes in their own world, and if rates drop they either spend more or pay more debt back each month. They do the maths and budget accordingly. Either way they are better off provided they have a job and their income is stable. So their confidence could only rise with lower interest rates.
Despite this logic many have doubted the wisdom of low interest rates suggesting the further they fall, the more difficult it is for banks to pass on the cuts to its mortgage customers. They also argue that more and more depositors are on zero interest rates.
Well this may be true if they leave their deposits with the banks, but there are many other options out there that yield 5 per cent or 7 per cent with not much more risk. Balmain Finance, an exhibitor at our upcoming Expo, offers a very attractive 7 per cent, La Trobe also offers 5 per cent. Both with negligible default rates.
RBA Governor, Phillip Lowe is painting a cautiously optimistic position citing many positives. The one key negative is the outlook for consumption which unfortunately is the largest segment of the economy (54.5% of the economy). For consumption to rise disposable income needs to rise. When interest rates fall this means a lower cost of debt and implies a rise in disposable income, albeit small but nonetheless a rise.
“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth.
The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.” Phillip Lowe
Irrespective of the economy, we all know that another interest rate cut is positive for the property market and that this emerging uptrend can only benefit.