mrd

Last month I felt there was a very strong case for the Reserve Bank of Australia (RBA) to cut the official interest rates by a full 1%. I kept my considered views to myself but wished I hadn’t afterwards (as you do).

This month I considered the arguments and reasoning put forward by economists, journalists and commentators; who mostly said that rates were likely to drop by 0.5% (although some argued a case for just 0.24% and others no rate cut). I concluded that the likely rate cut would be 0.75% (or possibly more)…

On Tuesday morning (Melbourne Cup Day), I decided to send out a mid week newsletter to that effect. Our email was delivered to mail boxes about 8 minutes BEFORE the RBA made their announcement. I was not the slightest bit surprised by them moving to cut official interest rates by .075%, but I was completely surprised when I watched the news 7:30 Report, Agenda & Lateline etc to hear how “everybody  had been caught unaware”. “The RBA surprised everyone”; was the opening line on one programme.

It’s important to undertake solid objective research that enables you to conclude a carefully considered position. In these times of uncertainty, where fear is being peddled, like a commodity, this is even more important.

I am not an economist and I am not offering financial advice. I do believe, however, that most people would do well not to quickly dismiss what I write because someone on television said something different or because you think I may have an agenda.

I am not interested in turning my newsletter into one of political and/or economics; however, I am going to offer a few more of my (rambling) thoughts on Interest rates (now & moving forward into the early part of next year)… and on the Federal Governments introduction of a carbon trading scheme; by 2010. If I turn out to be wrong, maybe I will qualify to be called an economist :-)

INTEREST RATES:

• Official Interest Rates will continue downwards and will be just 4% by April 2009
• I expect that the banks that have held off on passing on all of of Tuesday’s 0.75% rate cut will before this month is out

Q: So why did Commonwealth Bank announce that they will only pass on 0.58%?

PROFIT: The longer they hold off passing the full cuts on… the better for their bottom line. Then when they finally do pass on the difference they can grab another round of positive headlines.

POSTURE: Because they can!  After the years of bank bashing in Australia, the banks now feel vindicated for the way they have managed their affairs. After all, look at the rest of the world envying our banking system. They have some ‘poetic licence’ to ignore the external pressures being applied to them and take the attitude: “So are you suggesting we are not doing a 1st class job managing the banking system in Australia”?

Q: Why do I expect that they will pass on the remainder of this rate cut?

They may not, for my two reasons above. Anybody representing Government or a business or consumer lobby group who pressures them to do so can be ignored. After all, our banks are like “modern day hero’s” that have protected us from suffering the same fate the rest of the world has and is enduring.

HOWEVER, I do expect them to pass the full rate cuts on for the following reasons:

1. They have an obligation (moral responsibility perhaps?) on them, having been the beneficiaries of the recent Government deposit guarantee. We the tax payers are the underwriters of this guarantee; which has enabled them access to more funds and has LOWERED their borrowing costs
2. I agree that last month there was a ‘YES’ but this month it’s a ‘NO’ to the argument that the RBA factored in something for banks to hold back on. No, the RBA lowered rates by the full 0.75% for the benefit of consumers
3. Throughout this global liquidity crisis, Australian banks have managed to maintain near record profits. There is massive political, social and moral pressure to “ease the squeeze on working families”
4. Globally speaking, our banks have great strength and are positioned to grow. Lots of opportunity exists right now for strong healthy banks to gobble up some that may be a little “punch-drunk” right now. As an example, the Commonwealth Bank has just acquired Bank West from the Bank of Scotland in a “fire sale”. That just shows how a set of circumstances can means DISASTER for one… but OPPORTUNITY for another (PS: I have chosen my side).

In my opinion, there are so many, many reasons for property owners, investors (& would be investors) to remain optimistic about the opportunities going forward.

While we will experience a significant slowdown and rising unemployment; I don’t believe Australia will enter into a recession. In part because of the underlying health of our economy… but also because Kevin Rudd has way too much ego to even contemplate allowing history to label him as economically questionable. He knows only too well that the legacy of Paul Keating contains a lot of positive and progressive policies… that are simply lost on the memory that he delivered the “Recession we had to have”. At election time, Governments can be undone by those simple (yet often unfair) one liners.

The current global challenges are not of Kevin Rudd’s making. Yet he has been charged in no uncertain term to keep Australia out of recession. Maybe you and I have not charged him with this responsibility… but I believe he has charged himself and will therefore do whatever he has to to keep us growing.

If he can stand before the Australian public in 2010 as a leader who steered Australia through her most challenging time in recent memory… and if we as a nation avoided a recession, he is almost assured of another term.

CARBON TRADING:

The Opposition, Business groups and many others argue the merits of delaying the introduction of a Cap and Trade Carbon Trading (Emissions Reduction) Scheme… for a year until 2011. It is a HUGE effort for the government to meet this election promise and many would agree that a delay would be in our national interest given:

• Financial Crisis
• Growth slowing
• Unemployment rising
• Financial pressure on families and businesses

The Opposition are probably already scripting their “We told you so speeches” for when the “perceived inevitable” happens… i.e. the Rudd Government announces a back down. However, my personal opinion is that Rudd won’t have a bar of it. He will push his Ministers & staff and commit to doing whatever it takes to go into the next election with his head held high. He’ll want to say to the Australian public:

“They said it couldn’t be done before the full impact of the global credit crisis was understood… well we did it DESPITE the global credit crisis!

Again, this may be as much about ego as it is about going to the next election having fulfilled what was promised before the last… DESPITE all the hurdles that have since appeared. That’s OK, however, because those of you who were growing up in the 1970’s (such as Kevin Rudd) will remember the Skyhook song “Ego, It’s Not A Dirty Word”.

I reiterate again that I am not an economist and the future is one of those things better understood from a position of hindsight. So with regards to:

• The banks passing on the rest of this week’s rate cut… ask me in a month
• Official interest rates falling to 4% by April 2009… ask me in 6 months
• Rudd getting (at least in part) his emissions trading scheme up and running by 2010… ask me in 2011

Happy Investing,

Nick Lockhart

PS: If you Google “reserve bank australia interest rate cut 0.75%” the front page will bring up 10 results. 9 tell the history of the 0.75% rate cut and 1 predicts it (mrd in position 8) @ today, anyway.

Related Posts

• October 17, 2008 -- Nick Lockhart’s DEBT Series – Part 2… “DON’T PANIC”
• November 4, 2008 -- Will the Reserve Bank Cut Interest Rates by 0.75% (or more) TODAY?
• October 24, 2008 -- Nick Lockhart’s DEBT Series - Part 3… "Warnings Of Perilous Times Ahead (or Dodgy Seminars)"
• October 3, 2008 -- The Safest Asset Class
• June 5, 2008 -- Block Out The Noise
• November 21, 2008 -- The Property Investors Trifecta
• July 25, 2008 -- How The U.S. Sub-Prime Crisis May Affect You… Plus Who Are Fannie May & Freddie Mac?
• April 18, 2008 -- Reading This Will Cost You Five Minutes; Not Reading This Could Cost You Years!
• October 7, 2008 -- RBA Slashes Interest Rates By a Full 1% - News Roundup
• August 22, 2008 -- Why I Only Invest In Residential Real Estate!

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This entry was posted on Friday, November 7th, 2008 at 6:55 pm and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.