For years now, Australia’s central bank has been locked in a stalemate when it comes to assisting our economic fortitude with a monthly up, down or sideways movement in official interest rates.
Rates were dropped, and dropped, and dropped some more, as house prices shot up and affordability issues started pushing many punters out of home ownership contention, earlier this decade.
Then of course, property prices shot up even further, as equity-laden investors scurried to acquire shiny housing assets for their retirement portfolios. And then overseas buyers got in on the act too.
Fast forward to today, and the Reserve Bank will once again be feeling a heightened sense of pressure, as proceedings officially resume and the interest rate debate starts again in earnest.
Australian dollar not doing great
The first thing likely to be playing on the Reserve’s collective policymaking mind is our much maligned dollar, which recently received the less than ideal accolade of “worst-performing developed-nation currency in 2018.”
The Aussie dollar went on a downward spiral for 5 consecutive quarters, including a steep decline of 9.7% last year. Then on January 3rd, it took a so-called “flash crash”, diving to 67.41US cents, due to a holiday in Japan disjointing Asian markets; the weakest it’s been since the GFC.
According to data from Bloomberg, there’s a good chance – 42% in fact – that we’ll see our dollar dip to 66 cents by the end of the year.
Beware the Doom Loop
Head of Asia financial markets at Rabobank in Hong Kong, Michael Every, warned that Australia is “in a doom loop.”
Wage suppression, alongside our ever increasing cost of living and house prices in particular, has created a country of indebtedness.
Australia’s household debt to income ratio has soared from 67% in the 1990’s to 189% today, with this staggering growth fuelled largely by low interest rates and banks becoming more liberal with their lending policies, a few years post-GFC.
Every says the Reserve Bank will have little option but to start cutting interest rates again this year.
“When you have an economy that’s piling on debt the way Australia does, the currency gets well supported because everything looks fine and dandy in this growth bubble, he said.
“And then as soon as you reach the end of the rope, the only thing the RBA can do is cut – and keep cutting.”
Of course, this action could see our household debt levels rise further, if sufficient supporting policy isn’t introduced by governments to help revive other elements of Australia’s economic health, including wage and employment growth.
This year looks set to be just as challenging for the Reserve Bank and its decisions around monetary policymaking.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).