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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

By midday last Tuesday, the “vibe” in the market was that the RBA would cut rates (even though it was given a 50:50 chance) and they didn’t disappoint (at least half the market), reducing the official cash rate for the first time in 12 months, to a new record low of 1.75%.

As a work colleague pointed out to me, a cash rate at 1.75% is still higher than the current inflation rate so policy could still be seen as “stimulatory”. Therefore, this latest RBA rate cut is unlikely to be a one-off and, as history shows, is generally followed by another cut over the next few months. 

With very little the RBA can do on the demand side of the economy to boost inflation, we seem to be locked into a low productivity/low wage growth economy. If this is the case, the RBA’s only path to lift inflation is via a much weaker exchange rate. Without a continual series of rate hikes in the US, a much weaker Australian dollar will require more than just one further RBA rate cut.

Whether this follow up cut comes next month or in August (after the next CPI data) is difficult to predict but financial markets already have the probability of a cut in June at 10%, and for August it rises to 48% (refer chart below).

Implied cash rate by futures market

Changes to the Farm Management Deposit (FMD) scheme – effective 1 July 2016

The proposed amendments to the legislation governing the FMD scheme, announced as part of the Agricultural Competitiveness White Paper in July 2015, were passed by Parliament last week. The changes:

  • increase the maximum amount that can be held in FMDs by a primary producer to $800,000;
  • allow primary producers experiencing severe drought conditions to withdraw an amount held in an FMD without affecting the income tax treatment of the FMD; and,
  • allow amounts held in an FMD to offset a loan relating to the FMD owner’s primary production business.

We’re pleased to be able to deliver these changes to our farming customers, including the introduction of an FMD offset solution in the coming financial year.

For information about these changes, read our media release and information sheet

And finally, get strapped in for an eight week election campaign (the longest campaign in almost 50 years).

Source: Rural Bank

 

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