“So here’s the conundrum for the Reserve Bank. It would prefer a lower dollar. That’s because a higher dollar makes exporters less competitive and makes imported goods more competitive against local manufacturers.
Generally, the way a central bank manages the currency lower is by cutting rates. But the prospect of rising interest rates pushes our dollar higher.
But the Reserve Bank can’t even give a hint it’s thinking about cutting interest rates. That only throws more fuel on the fire of Sydney and Melbourne house prices -something the authorities, including the Reserve Bank are trying to manage down.
On balance … I’d say interest rates are going nowhere. But more good news will see our dollar scale 80 US cents. And that could really set off some alarm bells in the Reserve Bank.”
The Week That Was…
The minutes from the Reserve Bank of Australia’s July meeting were revealed on Tuesday and it did some very unexpected things to the Aussie dollar – it pushed it to two year highs, almost 79 and a half US cents.
A positive outlook on infrastructure investment, government spending and household consumption, displayed the RBA’s “glass half full” attitude to the current local economy.
The RBA’s reluctance to lift interest rates from record lows is also in contrast with other major banks across the global, including Canada and the US, where rising interest rates are signs the economy is returning to ‘normalised’ levels.
But the positive outlook, and the notion that the Australian economy is positive, spurred on forex traders.
Officials revealed that they now believe a cash rate of 3.5 per cent – well above today’s 1.5 per cent – would be a rate level that neither stimulates the economy nor holds it back.
That is eight interest rate rises of a quarter of a percent each from where we are today.
Now I think this is a marker from the RBA for households and business, to not expect interest rates to remain at record lows forever.
It’s giving you a big hint you should be paying off your mortgage as though interest rates are already two percentage points higher. To stress test your family finances if you like.
So say you have a $500,000 mortgage over 25 years at 4.5 percent; the monthly repayments are $2779 a month.
If you use the RBA formula that rates rise two percentage points, to 6.5, the repayment rises to $3,376 a month – or almost $600 a month more.
Could you cope with that? Well why not try … make the extra payments and pay down your loan more quickly, while rates are low.
The RBA’s given you the hint. So why not take it? The worst that can happen is you pay off a bit more of your home loan.
And that can’t be a bad thing.
The bank regulator has also announced moves to make all banks safer, with the big four bearing the brunt of increased capital requirements to make them “unquestionably strong”.
Essentially, its another safeguard to preventing another GFC, or that we could withstand another GFC, if you like.
The Australian Prudential Regulation Authority, or APRA for short, has outlined its new “capital adequacy” targets, and will require a 1.5-percentage-point increase in the minimum safety reserves that must be held by the big four banks and Macquarie.
Treasurer Scott Morrison says “It means the banks are in a positon, that they hold enough capital…to ensure that a bank is in a position to withstand the financial storm to come and has a reasonable position of strength.”
“It means our banks are stronger now than before they went into the global financial crisis…we all know the strong regulatory financial positon that we had at that time, allowed us to move through that and to continue lending through the global financial crisis which was so critical to so many businesses.” (Listen to full interview here)
However, the good news is that some of the banks, such as ANZ, already have met these requirements. This was shown in the banks shares which were up 3.92 percent at the close
However, Westpac and CBA still have a bit to go in order to meet those new requirements.
In order to comply with the requirements handed down by APRA today, the banks will have to retain some of their profits or sell new shares to boost their reserves, either of which could see the amount of dividends paid per share fall or grow more slowly.
It may also involve recovering some of the extra cost and maintaining profitability by increasing interest rates on loans.
It will be certainly interesting to watch this…
For all this and more, visit www.moneyaction.com.au
Superannuation funds have posted their returns, with an average delivering 10.4 percent. This not only adds $140 billion to the national retirement savings pot, but is a 2.8 per cent jump since last year – Watch here
Money News –
The dual-citizen controversy that embroiled the Greens earlier this week, got me thinking…we should have a 4,5,7 visa for politicians. Some world leaders are the best in the business and Former New Zealand Prime Minister John Key is the first I would give the visa too – Listen Here
Work. Life. Money –
NRL legend Jonathan Thurston joins me this week to discuss this amazing career. We chat about his final State of origin game, his retirement from representative football at the end of this year, and from the North Queensland Cowboys next season – Listen here from Sunday
Links to important headlines this week.