Transcription of Finance News Network Interview with Commonwealth Bank of Australia’s (ASX:CBA) broking arm CommSec Chief Economist, Craig James Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me today from CommSec is its Chief Economist, Craig James. Craig, welcome.
Craig James: It’s good to be here.
Lelde Smits: There appear to be some conflicting economic indicators at the moment: European debt concerns are lingering and the end of our mining boom is in question but, local house prices are recovering and US data has been encouraging. Given this all, do you believe the Reserve Bank of Australia’s (RBA) latest 25 basis point rate cut was appropriate?
Craig James: We think the Reserve Bank probably was a little bit premature. It’s not really though the local concerns which is a worry for the Reserve Bank, more the global concerns. And, I suppose if you were focussing on that the Reserve Bank wants to take out a bit of insurance. Knows, the global economy is a little bit softer at the moment. Cut interest rates, we’re in a position of strength we can be able to do that and sure up our domestic environment. I think it was probably a bit premature, but the Reserve Bank has shown in the past that it knows what it’s doing.
Lelde Smits: And where do you think we’ll see rates move over the next six months?
Craig James: Well customarily the Reserve Bank doesn’t just do one rate cut and then sit to the sidelines. So, we do think that we’ll see another interest rate cut in November and then it’ll move to the sidelines. I don’t think it wants to cut rates too far, if you get the cash rate down to 2.5 per cent or even lower than that, it’s a long way to go to get back up to normal. The Reserve Bank just wants to do just a couple of rate cuts, sure up our domestic growth fundamentals and then sit on the sidelines for a while.
Lelde Smits: You mention normal, what does a normal rate look like to you?
Craig James: I think a normal cash rate is getting up probably around about the 4.5 per cent mark. So, it’s somewhat below normal. The Reserve Bank believes that is appropriate in the current circumstances. But, at some point in time rates have got to go up just as they’ve come down.
Lelde Smits: What indicators will you be paying the most attention to ahead of the next and last RBA board meeting of the year?
Craig James: I think the housing indicators are really important at the moment. What we do know is that home prices are rising. We do know that there is more activity in the market, that there is more building starting to occur. And if that’s showing a degree of momentum I think the Reserve Bank can be a little bit more comfortable about the situation. Because if there is a slow-down in the mining sector, slow-down globally. But if there is a pick up locally, particularly in terms of the housing market, it has so many knock-on effects, so many multiplier effects through the economy. So, I think the housing indicators are worth a focus and then probably the retail spending to see whether consumers are getting their mo-jo’s back and getting their confidence levels back.
Lelde Smits: We’ve also just seen a mixed bag of Australia’s labour figures: Job ads are down, Australia’s unemployment rate has hit a 2.5 year high of 5.4 per cent. But, Australia’s economy added jobs over last month: What’s your assessment of Australia’s jobs market?
Craig James: Well, I think employers are cautious. There are looking overseas, they’re worried about what they see overseas. Little bit cautious about taking staff on at the moment. So, they will take on staff if they need to. But, most of them are just sitting on their hands, waiting for things to improve. We don’t think that the unemployment rate is going to rise too much, perhaps to a peak of 5.5 per cent. When you think about it, 5.5 per cent, a peak for unemployment, that’s not a bad outcome.
Lelde Smits: As mentioned, Australian miners can’t escape speculation the boom times are over: Do you believe the mining investment boom has peaked?
Craig James: We’re getting towards the peak of the investment phase. So, the price phase of the boom, well that’s peaked, and that’s to be expected. We had demand significantly strong in China, our producers we’re racing to catch up. Well, they’re catching up now and as a result prices are coming off. But still, the ongoing demand from China is going to be huge, and we have to invest in new projects to be able to meet that demand, and that’s what we’re doing now.
Lelde Smits: The stagnant housing market has also been cited as a reason by the RBA for the latest rate cuts: Do you believe the cuts will be enough to revive the property market?
Craig James: Certainly interest rates are low enough. There is no real problem in terms of interest rates. And, if we have another interest rate cut it’s just going to make housing even more affordable. The major problem has been confidence. The fact that Gen Y have not had confidence to buy a home. People haven’t had confidence to buy investment properties. Developers haven’t had confidence to go ahead, but I think that’s starting to change.
Lelde Smits: Finally Craig, the S&P/ASX 200 index recently hit a 15-month high: Where do you believe the market will move over the next year and what will be it’s biggest drivers?
Craig James: As we get into 2013 people are going to start to put their money to work again. We’re looking at the share market probably not changing too much by the end of the year [2012], 4,500/4,550, those sorts of levels. But, we’re looking at 4,650 by June of next year and 4,800 by December of next year. So, I think people will get confidence over time. They’ll have to put their money to work, and they will be putting some of that money to work in the share market as well as the property market. I think both those areas are going to be competing for available funds over 2013.
Lelde Smits: Craig James, thanks for the outlook.
Craig James: Not a problem at all.
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