The Foolish Behaviour of The R.B.A
Published by Jacob Field on 19 October 2022Let’s take a deep dive into the R.B.A.
And if you’ve been not living under a rock the last few years in Australia, the impact the RBA’s decision making has been having on property prices. Obviously inflation and interest rates. And we’re going to be looking at what has been said over the last year or two and how that has impacted the strange investing in property.
Because sometimes there’s some mixed messages coming out of the R. B. A. And they are under intense scrutiny now from the media, from the general public and now through the politicians some oversight that is finally actually starting to occur. So let’s dive in. This was a quote from February 2021 from the reserve bank governor Philip Lowe.
The board will not increase the catch rate, the cash rate until inflation actual inflation is sustainably within 2-3% target price. This was a message that was reiterated through covid into 2020 or late 2020 into 2021. Very consistent message. The board does not expect to increase interest rates until 2024 at the earliest.
So this is the first relevant piece of information. This is not just one quote. This was a reserve bank decision after reserve bank decision. This was a very consistent message that they do not foresee increasing the cash rate until at least 2024. Now now this is where the contradiction comes in because if you can remember back to the previous slide they would they need to get inflation into the 2-3% target band.
You know. So coming back here until you know, covid late 2020 we can see inflation here in negative territory then you know around that 1% inflation rate. They don’t foresee increasing interest rates until they were within the two or 3% target range. And they don’t foresee that occurring until 2024 at the earliest.
Well the original quote was in february 2021. Guess what happened in june 2021 inflation jumped up to 4% 3. 8% inflation. So did that result in the r. B. A. Changing their tax? They’ve been very sure of themselves by saying inflation interest rates will not be increased until 2024 then almost straightaway the next quarter inflation is above their target range.
So what did they then say at this point? Mr Lowe dismissed the market pricing in interest rate rises. So market, you know, reserve bank can say one thing but economists, you know the share market and currency markets interest rate, your yield curves.
They are all saying another. And the market priced in interest rate rises in 2022. Going right back until this time where the was sitting under a rock saying, we still don’t foresee increasing interest rates until 2024 low. The chairman Governor Lowe went as far as saying that he has dismissed market pricing the market pricing in a series of rate rises in 2022 as a complete overreaction and maintained it is still entirely possible that the cash rate will remain at its current levels until 2020 for he said that and this in 2022 this year, even after the inflation rate was above the target rain that they had set forth as a trigger to increase interest rates.
So they’ve just done a whole 180 over the period of a year. This is extremely concerning when they are really the dialogue, their logic, their rule set is changing month to month. Let’s go ahead. Are they trying to save face? Are they just telling this narrative this story and are they trying to do it with their arms tied behind their back?
This is what is concerning to me is there seems to be ego involved, there seems to be the R. B. A. And this impartiality, this huge amount of responsibility on their shoulders. And then you have the egos of the individuals involved this storyline to placate media to try and downplay mistakes.
This is not acceptable. Are they trying to save face? Are they backtracking? This was published in june 29. This is a broad media, you know, this is one article of many across the major mastheads in Australia. This shows you how the R. B. A. Is perceived globally. All right governor Philip Lowe speaking central banking conference in Europe, he was up there in front of the stage and he said, we don’t know inflation. We have a three month lag from a. B. S. We have a three month lag on inflation data.
And there was physical laughter right across the western world Europe. The bankers physically laughed. The R. B. A. In Australia was a laughing stock globally. Right? So all these monthly decisions, let’s increase inflation to slow down, let’s increase our interest rates to slow down inflation.
These are monthly decisions based on lag data, right? We’re trying to slow down inflation and we don’t know if it’s worked for three months and they’re not ramping up slowly which they should be doing. They are going full hog slowing down the economy and then crossing their fingers, hoping it’s going to work.
And you can see the backtracking, you can see the mixed messaging, you can see the sticking their finger up in the air and seeing what’s going to work. You can see them really not having much of an idea about anything at all with these statements, you know, ignoring the market signals, you can see what has been consistently occurring over the last two years.
And these are the guys that are ramping interest rates with a three month lag on the data that they need. So within the next couple of weeks, I’m actually speaking at a roundtable discussion with the property council of Australia, with the treasurer of Tasmania and the senior economist from aids and bank. The three of us are having a discussion on this very topic.
This is a serious issue right now. Today. What oversight is there on the R. B. A. Is their egos been involved and how can they be making these decisions right now? In contradiction to what has been said before with three month lag on their data, they are making decisions in the rear view mirror.
We are a first world economy but we are the laughing stock of our peers. This is unacceptable. Now this is an oversight committee. This is a parliamentary oversight committee. This is Philip Lowe, he’s on the grill, politicians are not happy. You know, these statements have extreme impact on confidence in the investment sector, on the owner occupier sector.
They have a tremendous impact on all of these millions of Australians in the last two years who didn’t go overseas on holiday but spent their money on renovating the family home, borrowing against their equity, increasing their loans, putting in a pool going and buying an investment property, creating strong inflationary pressure on property prices.
All based on the idea that interest rates weren’t going to be increased until 2024. Now, all this backtracking and all these contradictions in the earlier stages. Post covid it was an unqualified statement around 2024. Then they started to be qualifications. Then there was blinkers put onto Philip Lowes’s eyes where he said, we even what’s happening with the market pricing in interest rates were still not going to do it even when inflation was outside of their target range, they maintain their position and now suddenly inflation this year has spiked and so have interest rates.
What happens when interest rates when interest rates are increased without a feedback loop? 2? Is it slowing down inflation? What happens if the increases in inflation is not because of demand, but because of no supply, which is probably pretty likely. So these interest rate rises, might not slow down inflation or might not have the handbrake that the R.B. A. Is hoping that they do where you’ve got to look to japan as the example there and that resulted in stagflation. Japan is still not out of the 90s. They are still not recovered fully from the same types and set of circumstances and many of the same factors that we are seeing here. Now inflation interest rates not pulling it back and now you result in a recession or a downturn in the economy and this is stagflation.
What is likely to occur to property prices. Should we invest? Well, I maintain when you have your rule set, when you know how to identify opportunity in the property market, it always exists. We don’t have to buy in sydney and melbourne, okay, we can control the dialogue, we can go into these centres where the local story, the local drivers of strong capital growth are insulated from this guy, they’re insulated from interest rate rises because rents are rising as fast as interest rates.
The local economy is booming and they are like interest rate, what? We’ve got housing shortages here got no new homes being constructed. We’ve got record levels of homelessness, we’ve got vacancy rates under 1% in these locations. There is essentially no vacancies, you’ve got lines of people are wanting to rent properties, therefore rents are going through the roof. So how do we weather this confusion?
How do we weather this storm? We chase yields, we chase cash flow to offset interest rates, guess which ones I can claim off as its expense, interest rates. This is helping us after tax. We might actually even be in a more positive position when interest rates increase in rents also increase in line with them.
So that’s how we can create our own dialogue. It’s through education, empowering ourselves through knowledge and finding those areas of opportunity across the country right now that are potentially very well insulated from the wider Sydney and Melbourne, push and pull Perth parts of Adelaide parts of regional Victoria, New South Wales, Queensland.
These areas are really running their own race. The dialogue and the buying signals is extremely well aligned and very compelling right now. So let’s take the power out of these guys hands. Hopefully there’s some oversight, hopefully there’s some changes that come, but there are still extreme opportunities going back to the GFC Anna and I we were buying the large part of our portfolio through that time.
Interest rates were 7, 8, 9% were some of the mortgages that we had on our properties. But guess what rents were up at a higher level as well. We expect to see that to continue and the opportunities were just as compelling as a low interest rate environment. Where else are people going to put their money? We’re sitting on all this equity, we’re sitting on all these savings.
We haven’t been overseas for a few years. People are looking at the stock market, they’re looking at alternative asset classes. Property investment is very compelling right as of today. Hopefully that’s a good summary of the oversight that needs to come into the R. B. A. Decision making process and just giving you an overall picture, a bird’s eye view of where we are seeing the interest rate movements or inflation.