RBA MEDIA RELEASE- Monetary Policy Decision

RBA MEDIA RELEASE- Monetary Policy Decision

Statement by Glenn Stevens, Governor

As per its meeting yesterday, the Board decided to lower the cash rate by 25 basis points to 3.25 per cent, effective today, 3 October 2012.

The outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down, and risks to the outlook still seen to be on the downside. Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.

Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks. The terms of trade have declined by over 10 per cent since the peak last year and will probably decline further, though they are likely to remain historically high.

Financial markets have responded positively over the past few months to signs of progress in addressing Europe's financial problems, but expectations for further progress remain high. Low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels. Nonetheless, capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Share markets have generally risen over recent months.

In Australia, most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was quite firm in the first half of 2012, though some of that strength was temporary. Investment in dwellings has remained subdued, though there have been some tentative signs of improvement, while non-residential building investment has also remained weak. Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.

Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low. The Bank's assessment, though, is that the labour market has generally softened somewhat in recent months.

Inflation has been low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The introduction of the carbon price is affecting consumer prices in the current quarter, and this will continue over the next couple of quarters. Moderate labour market conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources. This and some continuing improvement in productivity performance will be needed to keep inflation low as the effects of the earlier exchange rate appreciation wane. The Bank's assessment remains, at this point, that inflation will be consistent with the target over the next one to two years.

Interest rates for borrowers have for some months been a little below their medium-term averages. There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy. However, credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook.

At yesterday's meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.

If you have any questions regarding the above article, please contact the office on 07 3397 7315 and speak to your financial planner.

A Simple Strategy To Maximise Your Return On Cash

After today’s rate cut by the RBA, questions are beginning to raise as to how best utilise your cash holdings in order to gain the best benefit. With Australians rapidly becoming a nation of savers, this is a problem crossing the minds of most people.

The consensus with regards to today’s rate cut is that the major banks seem likely to pass on some – but not the entire cut for their borrowing products however they will inevitably reduce the returns paid in their savings products, father widening the gap between deposits and lending products.

As an example, for a 3 month term deposit at NAB of less than $20,000 you could expect to earn 5.20% whilst the standard variable rate at the same bank is currently up t 7.31% a gap of 2.11%. A reduction today from the RBA of 0.25% could see the term deposit rate fall to 4.95% and the standard variable rate fall to 7.11% (assuming the bank passes on a 0.20% cut) increasing the margin to 2.31%.

The question then becomes “how can I make the most of my savings” and the answer is quite simple – you try and beat the bank at their own game. As opposed to having your savings housed in a deposit, you have the money sitting in an offset account. The difference is that instead of earning money at a rate of 4.95% you are now saving money at a rate of 7.11%. As an added bonus, because you are saving money now and not earning money, you have to pay no tax.

A higher tax payer would need the equivalent of a 10% plus interest rate from term deposit to be able to compete with the higher rate of savings and savings on tax, and given we are in a cycle of rate cuts, that seems a very long way off at the moment.

If you would like to discuss this or any other financial planning matters, please contact HKS Financial Planning on (07) 3397 7315 or mail@hksfp.com.au .

Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog.

HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.

2012 Expectations – Time to keep the faith

As we all move back into our daily routines following the festive season, we turn our attention to what’s happening around us and what impact these events may have on our lives.

If I remember back to the same time last year, the overall feeling with regards to the economy and markets was one of high expectation and positive sentiment, with most suggesting that 2011 was going to be a bumper year as the stock market rallied further from the low points seen in 2009. The sentiment lasted for only a brief period, as the toll left by natural disasters throughout the world in conjunction with political unrest in the US and a sweeping debt crisis in Europe began to take hold, culminating in one of the worst periods of volatility ever recorded through August, when swings of 5% were recorded in one day. As the market began to price in all of the unfolding developments, share prices fell and the mood once again returned to the gloomy days of 2008-2009 with word of an impending “GFC mark II”.

We are now into February of another new year, and thus far the sentiment is still rather negative as report after report seems to suggest that the onset of GFC mark II is imminent. At this point, it is worth remembering the feeling that was around at the same time – only one year ago, and how quickly things can change.

You see, although the press are reporting that the Greek debt crisis is on a knife edge, retail is in free fall and China is slowing – this is old news for global share markets, as these events have to some degree already been priced into current valuations.

It is for that very reason, despite all of the apparent bad news, that we have seen share markets the world over begin to rally throughout January and into early February. For all the bad events, the Australian, London and New York exchanges have seen gains of close to 5% whilst the German market has increased by over 10%.

What next?

The question now is are we through the worst? The short answer in terms of global events is probably not. The European debt crisis is not yet solved, but I suspect that throughout the course of this year the EU will continue to implement measures such as further austerity and perhaps seek some funding from the Central bank to improve credit, to improve the current position.

The US will continue its slow recovery from the deep recession that started in 2009, and global growth will continue although at a moderate level.  This however, is par for the course when coming out of a global recession, and although the growth maybe moderate, we should be celebrating the fact that it is positive instead of dwelling on the negatives.

I would expect however, given that the markets have already priced in some of this bad news, that we will see a fairly strong to moderate year for market returns – with the potential to become an exceptional year.

Continue with a long term approach

Often when we meet our clients for the first time, particularly over the last few years, the initial discussion tends to revolve around continuing losses and the clients needing advice on whether or not now is a good time to move to cash.

Our approach to this issue is to look beyond the immediate short term and develop a strategy that is suited to our client’s necessary time frame. More often than not, when dealing with superannuation, we would consider a long term time frame of over 10 years for investment purposes.

It is our role as advisers to listen to our clients needs and provide them with an independent view with regards to their financial situation, a view that is free of prejudice and that takes into account all the facts and figures in developing a strategy.

Whilst we are sympathetic to all those who have lost money in the last few years, we are yet to condone any clients moving to cash unless it is absolutely necessary or suited to their risk profile. The reason being that with a long term focus in mind, growth is often a necessary component, and although shares are volatile in nature (at the moment extremely volatile) no one can doubt the track record of shares over the long term.

Let’s take the last little period as an example. Following on from the dot.com bubble and September 11 attack the Australian index hit a low of 2,700 points in March 2003. Just over 4 ½ years later, the market had reached extraordinary highs of 6,828, representing a gain of 153%! However, as we have discovered, the market should not be measured on short term periods.

As we move beyond 2007 and into 2012, the market bottomed in March 2009 at 3,111 (down over 50% from 2007) back to a recent high of 4,971 in April 2011 and now recently closing at 4,365. Clearly, this demonstrates that the share market is volatile in nature; however the proof is in the pudding.

If we take that period in isolation (March 2003 to February 2012); the market has gained over 61%,meaning an investment of $100,000 during that period would be worth $161,666 today, below average for long time share market returns, however, this is still a pretty good result.

Comparatively, if we take the same money and invest into cash with an average return of 5% over the same period, we would have finished with a return of 40% or $140,000. Peace of mind would have cost us over $20,000 during one of the worst periods in market history.  In fact, if we look at the futures of both the cash and share market as they sit today they are heading in completely opposite directions. It appears on the surface, that after consecutive years of below average growth, global markets are poised for positive returns with optimistic views stating that there could be exceptional growth in the near future. Conversely, cash rates are falling – with the RBA implementing a rate cutting cycle that doesn’t look to end in the short term with each month potentially slicing more and more off of what was supposed to be a peace of mind investment.

Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog. HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.