Debbie Shankar - 2 Feb, 2016

Official Cash Rate Stays on Hold for February 2016

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eChoice RBA Commentary for February 2016

The RBA have left the official cash rate on hold at 2.0%.

This decision was based on:

o Inflation sliding;

o Falling petrol prices;

o An increase in retail sales;

o Increasing consumer confidence; and

o Rising employment.

Sliding inflation, falling petrol prices and strong employment growth have led to the Reserve Bank of Australia (RBA) leaving rates on hold for February. Though economists are predicting that a rate cut could be on the cards for June or July or this year.

Inflation Figures

According to official figures, consumer prices rose more than economist’s predicted. But, inflation stayed within the RBA’s target.

The Australian Bureau of Statistics (ABS) recently released its quarterly figures, which show that consumer prices rose by 0.4% over the quarter. This was 1.7% higher than 2015 data.

The RBA is aiming to keep inflation within 2 to 3%, when it sets interest rates. At present, the RBA’s preferred ‘core’ measures for consumer pricing rose, on average, by 2% over the last 12 months.

Quarterly inflation had been estimated by economists to be 0.3%, with an annual inflation of 1.6%. Core inflation was forecasted to be 2.1%.

This data has ruled out a rate cut, due to the headline CPI being under the expected rate, and underlining measures being within targeted forecasts.

Many economists suggest that falling petrol prices have played a major role in keeping inflation low. However, while inflation was lower than expected, this was not enough to prompt a rate cut by the RBA.

Petrol Price Data

Oil prices on petrol are sliding. Fuel prices fell by 5.7% in the December quarter. This was attributed to an oversupply of crude oil, which, in turn, lowers prices.

According to data, oil is trading at $US30 a barrel. This is its lowest price since the Global Financial Crisis in 2009. Amidst such pricing plummet, many people are now asking just how low will the price of oil go? Eighteen months ago oil was trading at $US110 a barrel.

Economists say that we’ve had an oversupply of crude oil for some time. At present, the oversupply is estimated to be between 1 to 2 million barrels per day. This is due to the fact that the US is now virtually oil self-sufficient, and Saudi Arabia, the largest producer of oil in the world, has stepped-up oil production to protect its market share.

Surplus Oil Supply

With oil prices plummeting comes financial fear for energy producers. At present, many are struggling to stay afloat. Santos and Origin Energy are said to be the hardest hit. Both companies have reportedly lost 70 to 80% of their value.

Oil dependant countries, such as Russia and Saudi Arabia are feeling the bite. Governments for these countries are reducing their spending.

For Australians, lower crude oil prices have been a Godsend with the cost of fuel dropping significantly. This has led to an increase in consumer confidence, which, in turn, has boosted retail sales and employment levels.

Official Cash Rate Stays on Hold for February 2016

Increasing Retail Sales

Credit card figures have risen as retail activity and sales have been strong. This has allowed retailers to increase margins as a higher turnover has given retailers a reprieve from discounting their prices to attract sales. The biggest rise in cost have been seen in clothing, men’s footwear, household goods, fruit and vegetables and communication.

Rising Employment

Data suggests that unemployment nationwide has fallen to 5.8%. While there was a fall of 10,000 jobs in December of 2015, job growth in November and October of the same year was strong.

November 2015 reached a job growth level of 71,400 jobs and in October a rise of 56,000 jobs. This was the highest rise in jobs sines the 1980s. Economists say that a decline of 10,000 jobs in December was marginal compared to the 130,000 jobs created over the 2 months prior.

Economists suggest that both employment and unemployment data have beaten expectations. They are anticipating that January may be the same. This represents a positive outlook for labour market trends.

Overall. The RBA have been said to be able to tolerate low inflation because the job market and business conditions have been steadily improving. In addition, low inflation is a global force, so rate cutting may not be fully effective. Further easing of inflation may lead to a lift in housing prices, which could jeopardise financial stability. Economists are predicting that if inflation remains on the bottom edge of target and growth remains below trend, then another rate cut could occur mid-year.

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