03 November 2014

The “Rate” that stops a nation

Is it the “race” or the “rate” that stops a nation?

For many Australians, the first Tuesday in November is synonymous with one thing - “the race that stops a nation”; the richest “two-mile” handicap horse race in the world – the Melbourne Cup.

Come 3pm this Tuesday all eyes will be glued to TV screens around the country for 3 minutes as punters wait and see if their chosen horse will be first past the post, hoping their “investment” generates a handsome return.

This time honoured event has the power to captivate the entire country, even those that do not normally follow the sport of horse racing will tune-in, and many will invest some of their hard-earned money (estimated to be around $800 million last year) on the outcome of the race.

However in recent years, a significant event that takes place 30 minutes prior to the big race has managed to steal punters attention away from the mounting yard - the Reserve Bank of Australia’s Monetary Policy Decision announcing any movements in the official cash rate (OCR).

You see for five of the last seven years, the Governor of the Reserve Bank of Australia, Mr Glenn Stevens has announced a change of the official cash rate (up and down) on Melbourne Cup day. Economists, bankers and consumers alike now all pay extra attention to the November announcement, and with the OCR at a record low level there is plenty of interest this year.

Just like the race itself, there are varying opinions as to what the likely outcome will be. In a recent straw poll conducted by The Adviser, respondents were asked where they believed the cash rate would be by Christmas:

  • 65 per cent voted it would remain where it is now (“taking a sit”)

  • 27 per cent expected it would go lower (“take the whip in hand”)

  • 4 per cent thought rates would go higher (“ease up”)

  • 4 per cent were undecided.

Almost all Economists have been reported as supporting the large majority of The Adviser’s respondents, expecting rates to remain unchanged this Tuesday, with some looking as far out as August 2015 before expecting any further changes to the OCR.

Factors such as a weakening labour market, slow wages growth and a persistently high Australian dollar have been suggested as being the reasons the RBA will hold fire on an increase to the cash rate at this point in time. It appears as though the central bank also has a close eye fixed on global growth and market volatility, noting concerns about China, Japan and Europe in its minutes of the October meeting.

Consumer sentiment, whilst stabilising following a period of decline, has been significantly outpaced by the increase in median house prices in capital cities, hurting future home-owners as the affordability gap continues to widen. Active property investors both here and abroad have contributed to the increase in median house prices which can be evidenced in Dwelling Investment figures which rose by more than 8 per cent in the past year to the June quarter and are expected to continue at strong levels on the back of solid numbers in building approvals.

Looking to the other side of what is preventing a rate cut is the risk of overstimulating the housing market. With median house prices rapidly increasing on the back of record level auction clearance rates, a further rate cut might just tip the property market over the edge and cause prices to rise even further, essentially shutting out a large percentage of consumers for the time being. Unless there is a major crisis leading to global recession I dont expect rates will be cut unfortunately.

Either way, if the cash rate does move, it will be the first change in 13 months – the longest period of interest rate stability since 2006. It was August 2013 when the last change was made, a 25bps decrease, Kevin Rudd was Prime Minister, and Gai Waterhouse was yet to win her first Melbourne Cup with Fiorente becoming Australia’s first female trainer to win the big race.

It is our expectation that rates will remain on hold at least until the middle of next year if they change at all then, and it appears the RBA board share the view that we are looking at “a period of stability in interest rates” as per the minutes from their recent board meeting.

Predictions (“the good oil”)

So as Mr Stevens approaches the “clock tower” on Tuesday, I suspect he will be sitting comfortably clear of the pack on his horse and will ride-on “hands and heels” over the line – with no change to the official cash rate.

As for those interested in having a flutter on the Melbourne Cup, well apart from the great Makybe Diva I don’t think there is often a “moral” in this great race. My best bet would be the Japanese horse Admire Rakti whose Caulfield Cup win was very impressive and looks to have been trained for this race, but maybe save a little for 4-time cup winning owner Lloyd William’s horse Fawkner who loves the Flemington track. For those looking for more value maybe Red Cadeaux as a sneaky chance at good odds – of course, as our legal team would say “this is not personal financial advice and past performance is no guide to future performance, speculate at your own risk”...

... That's Lending

Best regards,
Cory Bannister, Vice President, Head of Distribution
La Trobe Financial Asset Management Limited

La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 123 staff and has managed over AUD$10Billion covering over 100,000 investment grade assets since inception in 1952.

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