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Don Koch
Rates Expert
+ About Don Koch
About Don Koch

Don Koch's is the CEO of ING DIRECT, Australia’s 5th largest retail bank. Don began his careers with ING Group in 1999 when he was charged with setting up ING DIRECT Australia as Chief Technology Officer. Don's success in Australia led to start-up positions in Italy and key operations and technology roles in Poland, India and Australasia. Don began his career with the Commonwealth Bank of Australia, he then moved to Citibank, before joining ING Group. Don has advanced People, Change and Program Management and Business Transformation skills and a strong background in Banking Technology and Operations. Don is married with two teenage children.

Positive outlook allows RBA to take pause

Thursday, June 03, 2010

The RBA left the official cash rate unchanged at 4.5 per cent at its Board Meeting today. This pause followed a period in which the RBA increased the cash rate by 1.5 per cent between October 2009 and May 2010.

The RBA has continued to focus on banks’ lending rates, not solely the official cash rate. Lending rates have increased by more than the official cash rate as banks have passed higher funding costs on to borrowers.

With lending rates now at close to the average of the last decade, the RBA Board declared that the current official cash rate is “appropriate for the near term”

Will interest rates resume their upward path?

The general tone of economic news from overseas has been reasonably positive in recent months. The US economy returned to growth and began adding jobs. As has been well publicised, growth in the Asian economies remains strong, especially in China.

However, the emerging good economic news has been outweighed by major concerns out of Europe. Greece’s credit rating was downgraded and, after much turmoil, the International Monetary Fund and European Union established an assistance package. This has not calmed markets and, in fact, concerns over the economic health of other European countries have intensified. The credit ratings of Spain and Portugal have both been downgraded.

The concerns have not been restricted to government debt markets. Global equity markets have been extremely volatile and, in most cases, have sustained heavy losses over the past one to two months.

There has also been a trend towards “austerity measures” in many countries, especially in Europe. Globally, many governments implemented programmes to “kick-start” their economies since the onset of the global financial crisis. These programmes were mostly funded by governments borrowing funds from the money market. Several of these governments are now planning cutbacks to their spending programmes in order to protect their credit ratings.

It is no doubt prudent for governments to eventually reduce their public spending and begin to reduce the additional debt that they have incurred over the past two years. However, markets are concerned that sudden and deep cuts to public spending may push these countries back into recession. While this is mostly a European development, the RBA would be wary about increasing the cash rate against a backdrop of a slowing global economy.

The Australian economy continues to benefit from ongoing strong demand for commodities from Asia, especially China. The Australian labour market continues to perform strongly and unemployment continues to be below its long term average with strong demand for workers and a low unemployment rate, there are concerns that skill shortages may develop, especially in those sectors that benefit from the strong demand for commodities.

The local economy is not uniformly strong. Consumers are facing higher interest rates than a year ago and the impact of the government’s stimulus package is naturally declining as programmes wind down. Retail Sales have been sluggish, increasing by only two per cent over the past year. Housing finance has also suffered, falling by 19 per cent in dollar value over the past year.

The RBA’s preferred measures of underlying inflation have fallen from their highs of more than 4.5 per cent in 2008. However, they are still slightly above the RBA’s target range of two to three per cent. Inflationary pressures are re-emerging due to strong demand for resources and a tightening labour market. This will tilt the RBA towards increasing the official cash.

Weighing up the recent developments locally and overseas, it seems likely that the RBA will keep the official cash rate steady for at least the next few months. On balance, the strength of the local economy will eventually require the RBA to recommence its tightening of monetary policy. The key to the timing of the next increase depends on the situation overseas. If the turmoil in Europe is resolved swiftly then the RBA could be prompted to increase the cash rate by another 25 or 50bp over the remainder of 2010.

Don Koch's is the CEO of ING DIRECT, Australia’s 5th largest retail bank. Don began his careers with ING Group in 1999 when he was charged with setting up ING DIRECT Australia as Chief Technology Officer. Don's success in Australia led to start-up positions in Italy and key operations and technology roles in Poland, India and Australasia. Don began his career with the Commonwealth Bank of Australia, he then moved to Citibank, before joining ING Group. Don has advanced People, Change and Program Management and Business Transformation skills and a strong background in Banking Technology and Operations. Don is married with two teenage children.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

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