Laura Akhurst - 3 May, 2016

Consumer Price Fall Urges the RBA to Make a Rate Cut

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eChoice RBA Commentary for May 2016

The RBA have cut the official cash rate by 0.25% to 1.75%.

This decision was based on:

o A sharp fall in inflation;

o Consumer prices dropping;

o The Australian dollar falling;

o Stagnating wages; and

o A need for the Australian economy to stablise.

A sharp fall in inflation has spurred on the Reserve Bank of Australia (RBA) to make a rate cut. This comes after inflation has been under expected levels for more than 18 months.

According to data released by the Australian Bureau of Statistics (ABS), consumer prices dropped in the March 2016 quarter, with deflation recorded at 0.2%. This is the first time this has occurred since December 2008.

This, in turn, resulted in the Australian dollar falling by more than a cent to 76.4 cents in comparison to the US dollar. The annualised rate of inflation, which is the RBA’s core measure, is at a record low of 1.55%. This is well below the target inflation level of 2 to 3%, and it’s only the second time in 15 years that core inflation has fallen below RBA targets.

Economists Say a Drop in Inflation is a Sign that Couldn’t Be Ignored

Many economists are suggesting that the lower than expected rate of inflation is a sign that the disinflationary trend will continue. This, in turn, suggests that the Australian economy is struggling to stabilise. Based on this, economists are suggesting that it may take the rest of the year for inflation to move back-up to the RBA’s 2 to 3% band.

The falls in CPI are said to be spread over 6 of 11 key sectors. The biggest impact came from fuel prices, which were down by 10% and from fruit, which fell 11.1%. These price falls have been offset by rising costs in secondary education – up 4.6%, pharmaceutical goods – up 4.8% and medical services – up 1.6%.

Economists are saying that global deflationary pressure, soft domestic demand and weak growth in wages could see inflation remain below target for an extended duration. However, on the brighter side of the outlook, employment rates are now at 5.7%, the lowest they’ve been since September 2013.

National Inflation Figures

Inflation fell in 6 out of 8 Australian capital cities. Darwin and Perth were the hardest hit with Darwin falling 0.9% and Perth by 0.6% over the March quarter. The inflation decline in Perth came after a 2.2% decline in home prices for the quarter, and a 2.3% fall in rents. This is said to be the effect of the demand on housing after the mining boom. Darwin’s fall was attributed to a falling level of domestic travel and accommodation prices dropping as a result.

Brisbane recorded a flat level of inflation, and Canberra’s CPI rose by 0.2%. These were the only two cities that did not experience deflation.


Housing Market

Despite marginal price drops in some capital cities, such as Sydney and Melbourne, the residential housing market remains strong. Owner-occupiers represent the majority of buyers, over 70%, and new home building project sales remain on target in most sectors.

Key metropolitan markets are still experiencing undersupply, and a growth in employment numbers, as well as population is fuelling further activity. New South Wales and Victorian markets continue to strengthen, despite price growth moderating. However, this was to be expected, given the explosive pricing activity witnessed in the closing months of 2015.

Undoubtedly, the questions that everyone is eager to have answered though, is will the .25% rate cut make much of a difference to inflation? And will the banks pass on the rate cut to consumers? The answers should be revealed over the coming month.

Do you want to know more about home loans? Then contact eChoice and find the right home loan for YOU today.

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