We need a rate cut for Christmas

Founder and Publisher of the Switzer Report
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With fears of the fiscal cliff underwhelming the market, at this stage, this week’s focus will be on tomorrow’s decision by the Reserve Bank of Australia (RBA), which is going to have a big bearing on our term deposit strategy within our self-managed super funds (SMSFs).

In our investment strategy committee meeting for Switzer Financial Planning, we agreed that rates will fall over 2013 with the cash rate bound to go from the current 3.25% to something with a two in it! I’ve heard respected commentators say “I wouldn’t be surprised if it fell to 2%” – but I would!

There would have to be some kind of Armageddon scenario overseas for rates to fall that low and I’m not factoring in such an event for next year. However, with a big chunk of the world on near 0% equivalent cash rates, ours at 3.25% is simply too high.

It’s keeping the dollar at uncompetitive rates for local industry and this is reflected in stock prices for many non-mining related and non-financial stocks.

Shifting down a gear

Despite great figures last week for business investment (remember these were for the three months to September) planned investment figures are being cut back.

Next year will see the economy slow because mining will contribute less to demand, so the RBA needs to kick-start other sectors of the economy – housing, retail, tourism, services – and a lower interest rate and dollar will help this cause.

I will be surprised if the RBA plays tightwad at tomorrow’s rates decision and I would bet the Treasurer, Wayne Swan, will use the “f-word” if the media has to use the “no change” headline.

The Treasurer needs a break to give his budget surplus a chance and rate cuts are the only way he can believe that it just might happen. If Labor fails on this, it will be a big political problem for them as they made so much out of achieving this. I always argued it was not that important because I expected the economy to slow and while surpluses are better than deficits, history has shown me that if a government tries too hard for a surplus in a slowing economy, it can result in a big deficit.

This happens because a slowing economy increases unemployment, reducing tax collections and increasing dole payments and the like, which hits the budget’s bottom line.

Market outlook

Right now, the fiscal cliff is not spooking Wall Street because most believe a deal will be done. There could still be a few sell-off days if Congress leaders open their big mouths, but I can’t see the market dips being super deep.

So, let’s imagine the best case outcome where the cliff deal is done before Christmas and the RBA’s Glenn Stevens plays Santa Claus tomorrow – it could set us up for a nice rally deep into the 2013.

However, if the RBA remains frozen with fear about future inflation – unnecessarily – and the Yanks screw up their fiscal cliff negotiations, then this could be a disappointing festive period and New Year.

I don’t think Congress nor Stevens will play Grinch and scrooge our Christmas celebrations, but it’s still a gamble.

For term deposit players, I think the rates on these will fall over 2013, but rise in 2014 as the world economy starts looking better and inflation fears become very real.

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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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