Cash Rate Update – October 2014

The Reserve Bank of Australia (RBA) has announced it will maintain the official cash rate at 2.50%.

Since the RBA’s last meeting the domestic economy has seen a decline in the Australian dollar due to a continued reduction in commodity prices and strength in the US dollar. If the lower Australian dollar is sustained it should support our non-mining exports however, notwithstanding a strong housing related market, the Australian economy overall remains soft. With inflation under control and a global economy not growing as quickly as expected the RBA will most likely remain on the sidelines for another 6 – 12 months.

Cash Rate – No Change

The Reserve Bank of Australia (RBA) has announced it will maintain the official cash rate at 2.50%.

Most Economists are now forecasting this period of interest rate stability to continue until mid-2015, notwithstanding an improvement in business confidence, as measured by a recent Dun & Bradstreet survey of 800 businesses in Australia. 40% of the surveyed businesses are expecting their profit in the final quarter of 2014 to be higher than in the same period a year ago. Just 11% are expecting their profits to fall. Business in the retail, services, finance and real estate sectors are the most optimistic about the next three months whilst those in the manufacturing, construction, transport and utilities sectors still expect their profits to reduce.

Interestingly, the survey showed an increase in the number of businesses expecting prices to moderate, meaning less pressure on the RBA to increase the cash rate and supporting the Economist’s expectations of no change to the cash rate for many months.

Building Approvals

Prepared by Bank of Melbourne

  • The pace of growth in building approvals appears to have hit a speed bump with back-to-back declines over May and June. The annual rate of decline slipped to 13.0% in the year to June, but we expect approvals should return to positive growth in July.
  • Weakness over the past two months has been concentrated in private sector ‘other’ dwellings. Although the sharp drop is somewhat worrying, caution should always be taken in interpreting this data given approvals within this category are extremely lumpy. Approvals in private sector houses fell in the month, but the trend remains upwards.
  • The decline in June was driven by Victoria, reflecting a pullback from above average levels of activity. The number of building approvals in NSW for June overtook Victoria’s for the first time since November 2007, and suggests a shift may be beginning to occur among States. An upward trend is intact for NSW, QLD, WA, SA and the ACT.
  • Today’s data, however, could signal some underlying weakness in dwelling investment, although we expect a recovery to continue. Taken with a rise in the unemployment rate, well contained inflation and concerns about the impending drop in mining investment, we expect the RBA will cut the cash rate by 25 basis points when it meets next week.

Excellent US & Europe market update from Bankwest Business – 28th June 2013

Volatility was crunched again overnight as the Fed released several doves to comfort the ailing bond market. I’ve put a full synopsis below courtesy of but in brief the message was that the market has totally overreacted, policy is still data dependant and no significant shift has occurred. Rate hikes are a long way off and seen in 2015, not 2014 as the market had been eyeing.

Equities, that all look cheap compared to last month were snapped up in Europe and the US again with the Eurostoxx rising 0.66% and the S&P climbing 0.62%. Treasuries ground higher with the unwind in shorts only briefly tempered by more positive data in the form of personal incomes (+0.5% vs survey +0.2%), jobless claims down 9k to 346k and pending home sales surging 6.7% MoM. Yields on the 10yr fell 6.3bps to 2.47%.

Gold slumped another $27 or 2.2% to $1200 while oil in NY rose $1.20 or 1.25% to $96.77, copper flat.

(US) Fed’s Powell (FOMC neutral voter): Market expectations for a 2014 rate increase are out of line with the Fed’s view, it is most likely that asset purchases will continue for some time- Data is more important than dates in QE. Economy is a long way from full employment. Still a strong case for continued policy support from the Fed. strong. – There are good reasons to believe that the economy will continue to gain strength. Have seen real progress in the labor market. – Economic growth would be even better if not for fiscal drag. Tighter fiscal policy could be holding back job growth. – Surprised by how robust consumer spending has remained despite the fiscal drag. – Low inflation rate partly reflects transitory factors. – There is only mixed evidence that QE3 is still effective, but on the balance it is likely still a positive factor. – Follow up Q&A: – Chairman Bernanke signaled only a very small change in policy last week. Bernanke said explicitly that rate policy has not changed. >- If we do not realize our economic expectations, Fed will not reduce QE purchases. – rates will be low for a long time, rate hikes are well down the road. Expect a significant interval between end of QE3 (LSAP) and consideration of rate hikes. – Even if we let assets roll off the Fed balance sheet, they will roll off at a fairly quick pace. – Will not even think about rates until unemployment hits the 6.5% threshold. >- Considering the fiscal and other headwinds, Q1 GDP growth was not that bad. Q1 GDP is old data and we have seen significant improvement since then. – Not the Fed’s role to tell markets what to do or think; market volatility after Bernanke’s comments were not a surprise, but may have been a bigger reaction than expected.

Believe Bernanke was clear in his press conference, and the press conference is an appropriate forum for providing more clarity on policy.

When we get “closer to port” we can provide better guidance. – Believe the absence of Glass-Stegall regulations was only a small contributing factor to the financial crisis.-
(US) Fed Dudley (dove, voter): do take into account financial conditions but economic news supersedes market rates – Q&A- Believes Chairman Bernanke was very clear when stating outlook for policy, nothing he said should have surprised financial markets. – Baseline economic forecast could be wrong, we are not infallible. – No evidence that lower QE purchase pace would impact rates. – Fundamentals of housing market are very strong. – Inflation target is symmetric, do not want to miss on either side. Inflation expectations remains well anchored. – Higher rates are not likely to be a problem for banks.-

(US) Fed’s Lockhart (dove, FOMC non-voter): Chairman Bernanke’s comments on bond buying did not represent a very big shift in policy; the pace of bond buying depends entirely on the economy- There is no predetermined pace of reductions in the asset purchases, the stopping point is not fixed. – If inflation expectations soften, Fed would have to re-evaluate the appropriateness of policy. – Expect jobs growth trend from the last 12 months to continue. – Interest rate increases are likely to come sometime in 2015. – Reiterates if current job growth trend continues and labor force participation rate stays stable, unemployment should hit 7% by mid-2014. – Sees 2013 GDP growth of +2.0-2.5%-

Elsewhere the White House revealed that there was no front runner in the decision to replace Ben Bernanke, Yellen is often mentioned but others potentially under consideration include Larry Summers and Tim Geithner.

European leaders announced the first draft of their banking union scheme that will allow the use of the ESM, the legislation will not go through for some time but leaders are touting it as a vital step towards a more stable Euro Zone.

Revisions to the national accounts in the UK showed that in fact, the country never even entered a double dip recession let alone the triple dip that some were touting earlier this year. Sadly the historical revisions did little to help the pound, which fell another 50pts to 1.5256 last.

2013 First Home Buyer Changes

The Victorian Government has announced some changes to state taxes and grants which will be included in the 2013-14 State Budget when it is handed down on 7 May 2013.

Please be aware of the following important changes affecting First Home Buyers purchasing residential property in Victoria from 1 July 2013.*

First Home Buyer Grant

From 1 July 2013, the First Home Owner Grant (FHOG) will increase from $7,000 to $10,000 for newly constructed homes under $750,000.

The increase in the FHOG will apply for first-home buyers who enter into a contract to purchase or build a new home on or after 1 July 2013. This includes newly constructed houses and apartments built under a home building contract, built by an owner-builder, purchased off the plan or sold for the first time as residential premises.

The Government has also announced that the existing $7,000 FHOG on the purchase of an established home will conclude on 1 July 2013. To receive the FHOG on an established home, first-home buyers must enter into a contract to purchase the home on or before 30 June 2013.

First Home Buyer Stamp Duty Reduction

The Victorian Government is bringing forward stamp duty cuts of 40 per cent for all first home owners taking effect from 1 July 2013. Currently the concession is 30 per cent for eligible first home buyers purchasing a principal place of residence (PPR) valued at not more than $600,000.

Stamp duty concessions for eligible first home owners (whether newly constructed or established homes) will increase to 40 per cent from 1 July 2013 for homes valued up to $600,000.

Eligible first-home buyers will benefit from a further 10 per cent duty reduction from 1 September 2014 for homes valued up to $600,000, increasing total duty savings for eligible first-home buyers to 50 per cent.

Note the stamp duty concessions are determined by the settlement date not the contract of sale date. (ie, An eligible first home buyer will still be entitled to the 40 per cent duty reduction if they entered into a contract to purchase their first home before 1 July 2013, as long as settlement occurs on or after that date.)

For more information please feel free to contact a First Point Group Consultant for an obligation free discussion.

We look forward to working for you!

*Above details sourced from State Revenue Office Victoria and correct as of 06/05/2013 –