Rates: Where do we go from here?

The RBA provided no surprises following its April board meeting leaving the official cash rate on hold at 1.5%. The RBA remains more confident regarding global growth, see Australian economic growth as moderate, regards the labour market as being mixed, sees a gradual rise in underlying inflation and continues to see conditions in the housing market as varying considerably across the country, but sees recent regulatory measures as reducing the risks associated with high and rising household debt.

This note looks at the outlook for the cash rate, the impact of bank rate hikes and the implications for investors. Read more here

Lest We Forget

Interest rates remain on hold

Happy Melbourne Cup Day!

The Reserve Bank Board met today and decided to keep official interest rates on hold at 1.5%.

The recently released September quarter inflation data confirmed that underlying inflation at 1.7% year on year was broadly in line with expectations, with fruit and vegetable price rises being offset by lower petrol prices on average. This release is probably the key determinant of the RBA's decision.

Macquarie Bank forecasts the most likely timing of further interest rate cuts to be February and May next year, as inflationary forces remain subdued.

The last RBA board meeting for 2016 will be held on Tuesday 6 December.

Next stop, US elections.

Rick Maggi

54.2 million worries

We are going through one of those periods where it seems there is a long list of things for investors to worry about: the US election; the Fed; ever present fears about a break of the Eurozone; and China. This article, from Dr Shane Oliver (AMP Capital) discusses some of the very real risks out there and how to manage the noise and worry. Definitely worth reading.

Read more here                                                                                                                                  Rick Maggi

Interest Rates On Hold

Now that the weekend's grand final sporting festivities have come to a close, I'd like to draw your attention to today's rate announcement and the thoughts on why the Reserve Bank of Australia has made this decision. 

In making this call, the RBA has resisted temptation to further lower rates, opting instead to wait until the September quarter CPI data is released to allow it more time to measure the impact of the August rate cut.

Home values rise 1.1%

The CoreLogic Home Value Index recorded a 1.1% rise in dwelling values in August, with six of the eight capital cities recording a lift in dwelling values over the month. Performance of the combined regional areas remained comparatively soft, with dwelling values virtually flat at -0.1%.

The strong combined capital cities headline result masks the underlying movements associated with dwelling values which are trending differently from region to region and across the broad property types.

In Sydney and Melbourne, dwelling values continued to increase at more than 1% month-on-month, with the cumulative growth (June 2012 to date) now reaching 64% in Sydney and 44% in Melbourne. Outside of Sydney and Melbourne, the third highest rate of capital gain over the same period was Brisbane at 18%, and was as low as 4% for Darwin.

The most recent twelve month period has seen dwelling values rise by a lower 7% per annum, with Perth and Darwin the only capital cities to record a fall in dwelling values over the same period, dealing by 4.2% in both cities. Softer economic conditions and a significant fall in overseas migration rates, together with an increasing net outflow of residents to other states and territories, has made a substantial dent in housing demand, reducing values and rental returns.

Read the full report here.

Super: not giving an inch

At the Bloomberg Address today, Treasurer Scott Morrison was asked about his previous statement about not changing the superannuation rules and his definition of retrospectivity. His unequivocal reply leaves little hope for those expecting a retreat.

His reply...

“I stand by everything I said in that statement for the simple reason that the retirement phase remains tax-free. You know that. The retirement phase account, which under our proposal with a transfer balance cap, will mean that 99% of people who have balances less than $1.6 million will remain absolutely in exactly the same situation that I referred to.

The changes that we put forward, which I hope at least from my point of view as Treasurer I never have to revisit, and I certainly have no intention of revisiting them, will ensure that those rules are now set for the future.  

Why did we have to change the superannuation system? Because we have an aging population and we have system that is frankly overly generous for large balances, and the cost of having those large balances and the tax concessions … which have only been there since 2007, by the way, they weren’t introduced by Henry Parkes or anyone else like that [Editor’s note: Parkes served five terms as Premier of New South Wales between 1872 and 1891]. Those arrangements were brought in when the Budget had a $20 billion surplus and $40 billion in cash.

What we have chosen to do is make the superannuation system more sustainable in future. We have targeted a higher rate of tax, true, at the whopping rate of 15% for earnings on balances above $1.6 million. That enables us to preserve the exact situation that I was speaking in favour of at the SMSF Conference. We allow 99% of people who have saved for their retirement to have the deal that I said they should have, that is, paying no tax on what they have contributed to superannuation over their lifetime.

I know there are those with balances more than $1.6 million who are unhappy about that. I know there are less than 100,000 people in the country who have already put more than $500,000 into super after their pre-tax contributions [Editor’s note: he probably means in after-tax contributions]. I know there are those on very high incomes who will be paying more on their contributions going into superannuation now than before.

The alternative to that is for me to tell my kids, ‘You’re going to have to pay higher taxes to support those concessions.’ I don’t think that’s fair and I’m not going to do it.”