- 5 Jul, 2016

Economic Data Points to an August Interest Rate Cut

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eChoice RBA Commentary for July 2016

The RBA have left the official cash rate on hold at 1.75%.

This decision was based on:

o CPI inflation data being due out on July 27th;

o Assessing the impact from Britain’s decision to leave the EU; and

o Evaluating the fallout from changes to foreign buyer legislation.

The Australian Reserve Bank (RBA) have left interest rates on hold as they await inflation data, due out later this month. However, economists are predicting that July inflation figures will be lower than expected and that this will prompt the RBA to cut rates in August.

The figures that the RBA are waiting on are for the June quarter, with this data anticipated to give the Reserve a better indication of how much goods and services are costing Australians. The next sitting for the RBA will be in August after figures are out, and this is when economists are expecting an official cash rate cut from 1.75% to 1.5%.

Why Inflation Data is so Important

The RBA typically aims to keep inflation rates between 2 to 3% as this is the ideal standard that supports high economic growth and enables the nation to maintain pricing stability. When this rate of inflation is greater than the ideal, or lower, as the case is at present, then the RBA will adjust the official cash rate to alter this rate of inflation.

In the last quarter, the rate of inflation was at -0.2%, the first decline recorded since the fourth quarter of 2008. The annualised rate of inflation is 1.3%, well below the RBAs target.

Economists are predicting what the rate of inflation will be for the 2nd quarter of 2016, but they are waiting for the Australian Bureau of Statistics (ABS) to confirm their suspicions. With prices for fuel falling by 10% in the first quarter along with household goods falling, economists suggest that the Reserve will have no choice but to lower rates next month.

The Impact of the UKs Brexit Vote to Leave the EU

The fallout from the shock vote for Britain to leave the European Union has not been enough to force the RBA to drop rates this month. The Reserve are said to be waiting to see what affect this change will have on the Australian dollar and economy. Initially, the RBA and economists believe that the direct impact will not be profound. However, this could change over the coming 12-months.

Economically speaking, Britain will feel the bite from their exit, and as a direct result, the UKs economy is expected to decline sharply. Predictions suggest that Britains current growth rate of 1.6% will slow to approximately 0.6% over the second half of 2016. This rate of growth is then anticipated to carry into 2017 as the nation establishes itself as an independent.

Economists are predicting that the Bank of England and the European Central Bank will ease monetary policy to stabilise the British economy. Economists are not certain whether or not the UKs move with have a widespread impact on an already weak global economy, but they are not discounting the possibility.

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Housing Market

On the Australian housing front, it is anticipated that housing price growth will continue to cool, especially in Sydney and Melbourne markets, where price growth has been at record levels over 2015. Economists are suggesting that property price growth in these capitals will be halved over the coming months due to tighter lending guidelines and an oversupply of apartments. The introduction of increases to foreign buyer stamp duty is also expected to have an impact.

The annual rate of growth in Sydney and Melbourne for property pricing over the last 12-months was around 10%. However, economists are suggesting that this rate will fall to between 2 to 5% during 2017, and the national rate will decline to between 4 to 5%. One of the biggest factors in this decrease being the stamp duty and land tax increases to foreign buyers in Queensland, Victoria and New South Wales.

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