Unsurprisingly, the RBA has decided to leave the official cash rate on hold at 1.5% p.a. at its meeting today, Tuesday, 7 March 2017.
In fact, we would not be at all surprised to see rates stay on hold for the rest of 2017, given the current macroeconomic picture.
Low global growth, inflation figures, and wages growth — along with housing affordability issues in Sydney and Melbourne — are all constraining the RBA’s ability to lower interest rates further.
That is not to say that the banks will care too much for the official rates. Driven in part by a tightening mandate from the Australian Prudential Regulatory Authority (APRA) — and their own risk concerns over a hot property market (at least on the Eastern seaboard) — expect more out of rate interest rate hikes for property investors.
The Australian economy seems to be ticking along in the right direction (even if at a far slower pace than long term averages), supported by a sustained uptick in commodity prices throughout 2016. However, what happens overseas is likely to have far bigger consequences than anything we may do domestically.
Donald Trump’s Reagan-like policies of big spending and corporate tax cuts have seen most economists around the world feeling optimistic that the U.S. is finally breaking free of the funk that descended on it after the G.F.C. in 2008.
To prove everyone seems to be drinking from the same Kool-Aid, the Dow Jones broke through a record high of 20,000 points on 25 January 2017, only to keep on going all the way up to 21,115 by 1 March. It will be interesting to see if the euphoria continues throughout the year as some sobering realities kick in, such as the amount of debt the U.S. has racked up to pay for all of this economic stimulus.
In fact, on 16 March, Donald Trump is to submit his first big spending budget to Congress. On the same day, the debt limit suspension the federal government has operated under since an 11th hour reprieve negotiated back in 2015 will expire. Remember that back in 2015, the world economy almost went into a meltdown as Congress debated whether or not to lift the debt ceiling to keep the American economy going.
16 March will be a D-Day of sorts, as Congress must vote to either raise the debt limit or force the government to live within its means — only paying bills out of cash on hand and tax receipts.
To get a feeling of how big this debt problem is, watch this video:
Additionally, we are keeping a careful watch on how the Chinese government manage their own transition from debt-fuelled growth to a more sustainable, consumption-driven model of economic prosperity.
Anyway, this information is not designed to scare anyone, but simply to highlight that all is not rosy around the world, and the challenges and opportunities presented over the last decade may not go away even in the next decade or two. If you want to make the most of these uncertain economic times, you’ve got to have a plan.