#3 RBA Keep rates on Hold!!!

Homeowners who are grappling with the cost-of-living crisis will no doubt welcome today’s decision to leave the cash rate on hold.??

With the economy cooling and inflation slowing some economists are optimistic that the next move by the RBA will likely be a rate cut, potentially in September. I really feel this will not happen maybe until into 2025. Inflation really is still to high and house prices are still to hot. A (REIA) report found the average household is now spending just under 48 per cent of their income on mortgage repayments.?REIA President Leanne Pilkington said that given the current cash rate, it was “no surprise” affordability was at its lowest on record since the REIA’s first ever report.?“Housing affordability in NSW, Victoria, South Australia, Tasmania and the ACT is at its lowest point in 20 years,” she said.?“Queensland emerged as the biggest loser in the affordability stakes declining in housing affordability by 2.8 per cent in the quarter.?“Only with rate rise relief will we see changes to this outlook.”

About Reversionary Pensions

When a beneficiary first becomes a recipient of a reversionary pension a few items need to be considered.

• As the pension is continuing, it must satisfy the minimum pension payment obligations in the year of the primary pensioner's?death. The exemption from this obligation only applies for a pension that is not reversionary.
• The minimum pension percentage applicable to the beneficiary is not applied until the following year.
• Even though the pension account balance at date of death does not affect the beneficiary’s transfer balance account for a year: a TBAR must be lodged within 28 days of the quarter of the primary pensioner’s death and the beneficiary’s total super balance will include the balance of the reversionary pension at the next 30 June so may affect their contribution options.

It's important to make the distinction between the timing of the transfer balance cap and the total super balance affect

Outlook for investment markets

Easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025 should make for good investment returns this year. However, with a very high risk of recession and investors and share market valuations no longer positioned for recession and geopolitical risks, it’s likely to be a rougher and more constrained ride than in 2023.

We expect the ASX 200 to return 9% this year and rise to around 7900. A recession is probably the main threat. Bonds are likely to provide returns around running yield or a bit more, as inflation slows, and central banks cut rates.

Unlisted commercial property returns are likely to be negative again due to the lagged impact of high bond yields & working from home.

Australian home prices are likely to see more constrained gains compared to 2023 as still high interest rates constrain demand and unemployment rises. The supply shortfall should provide support though and rate cuts from mid-year should help boost price growth later in the year.

Cash and bank deposits are expected to provide returns of over 4%, reflecting the back up in interest rates.

A rising trend in the $A is likely taking it to $US0.72, due to a fall in the overvalued $US and the Fed moving to cut rates by more than the RBA.

Australian economic events and implications

Business conditions improved slightly in February according to the NAB survey. That said confidence remained subdued, orders fell and hiring plans point to slowing jobs growth. The NAB survey also showed an ongoing decline in hiring plans pointing to slower jobs growth. Taken together this is all consistent with soft economic growth.

Source: NAB, Westpac/MI, AMP

The NAB business survey showed that purchase costs and labour costs were unchanged but final product prices rose slightly – all are well down from their highs but remain elevated relative to pre pandemic levels.

Source: Bloomberg, AMP

Company insolvencies on the rise but remain low as a percentage of registered companies. It’s a similar story with mortgage delinquencies.

Source: Bloomberg, AMP

Government to axe 500 “nuisance” tariffs – but don’t expect a noticeable fall in prices. This is because although the axed tariffs were levied at 5% they raised very little revenue as businesses had applied for exemptions and so abolishing them means little impact on prices. It’s a good economic reform though as it lowers business compliance costs. But given its small impact, hopefully it’s a stepping stone to wider tax reform. The big gains in cutting tariffs were in the 1980s and 90s

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Source: Macrobond, AMP

Expect a diminishing Federal budget revenue windfall. For the last few years, the Federal Budget has been boosted into surplus by windfall corporate tax revenue (on the back of high commodity prices) and personal tax revenue (with stronger than expected employment and wages). While a budget surplus still looks on track for this year, Treasurer Chalmers has signalled the windfall may be slowing reflecting falling iron ore prices (although they are still above budget forecasts) and slowing jobs growth. This is partly political to keep a lid on his ministerial colleagues spending demands and to manage expectations ahead of the May Budget. But it highlights that a return to deficit is likely next financial year, and we need to redouble efforts to slow structural spending growth.

Happy Investing!!!!!!

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IMPORTANT DISCLAIMER: This is not advice. Readers should not act solely based on the material contained in this newsletter.