- 7 Feb, 2017

Low Inflation Sees Rates Left in Holiday Mode

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The latest inflation rates, which are stubbornly low according to economists, have prompted the RBA to leave rates on hold. Economists even suggest that unless inflation starts lifting, then the Reserve will not raise rates for some time.

Rates of Inflation

According to market analysts, the current rate of inflation is creating a holiday atmosphere in the market. You know, where everyone is on annual leave, so no-one is available to make changes.

Latest figures indicate Australias headlining rate of inflation slowed to 0.4% for December. Subsequently, this result was 0.3% lower than the expected 0.7% recorded in the September quarter. Furthermore, yearly data also missed Reserve Bank targets of 1.5%.

On the other hand, average core inflation, which strips out any volatile markets, also stayed low at just 0.4%. Nevertheless, economists hoped for 0.5% for the month. Also, annual core inflation increased to 1.5%. But, this rate was less than the economists anticipated.

As a result of low inflation, economists now suggest Australians will not see an official cash rate rise before this Christmas. However, this does not prevent lenders from making independent rises, as they have done in the past.

The Australian Dollar

After the release of data, the Australian dollar nosedived by 0.6% to US75.37c. Thus, the Aussie dollar was the most underperforming currency in the market at this time. Over the past month, the Australian dollar was amongst the stronger currencies, hitting a high of US76.09c. Nonetheless, but iron ore prices were also higher. Consequently, financial experts say that the RBA will have a tough time getting inflation back to its 2-3% benchmark.

Housing Market Conditions

Besides, with the housing market remaining steady, it is unlikely that the RBA will move rates in the near future. In fact, CoreLogic RP Datas latest report, capital city dwelling values have surged by 10.9% over the 2016 calendar year. Accordingly, December 2016 capital city values rose by 1.4% including capital gains and gross rental yields. As an asset class, housing returned an annual rate of 14.7% over the capital cities.

Capital city growth rates, according to CoreLogic, are also showing signs of divergence, where dwelling types have vastly different results. For instance, over the past 12-months, some values in capital cities have risen by 11.6%. Although, units have only risen by 5.9%. This divergence is more profound in Brisbane and Melbourne, where unit oversupply has eroded buyer confidence. Hence, over the year, Melbourne home values have risen by 5.1%, while unit values have only risen 1.7%. Brisbane home values, on the other hand, rose 4.0% over the year, but unit values fell by 0.2%.

The regional housing market in Australia recorded a growth of 2.8% over combined markets. Therefore, New South Wales was the strongest regional market. In this state, Non-capital city house values increased by 7.3% over 12-months, while other states rose 1%. Regional Western Australia, however, declined by 7% in value.

Further Rate Predictions

Many economists suggest that the RBA will remain on hold for much of 2017. However, with such a low level of inflation, the RBA may be forced to make another rate cut if theres no sign of improvement. A cut will occur, say economists, so unemployment rates remain steady as these will rise as economic growth slows. If a further rate cut occurs, economists indicate this reduction will be in May.

Despite this, lenders may raise fixed rate home loans higher. Plus, there is also suggestions that interest-only loans will rise over the coming months.

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