Laura Akhurst - 2 Aug, 2016

Inflation Rises Marginally Pushing RBA Rate Cut

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eChoice RBA Commentary for August 2016

The RBA have cut the official cash rate by 0.25% to 1.5%.

This decision was based on:

o The June quarter CPI being higher than the March quarter;

o Unemployment rates holding at 5.8%;

o Inflation remains well below the RBA’s target range;

o APRA’s intervention in the credit markets impact; and

o The RBA wishing to keep home prices lower.

Volatility in financial markets following the UK referendum, the Reserve Bank are keeping a very close eye on global economic activity as well as domestic data, including mixed labour market indicators, low than expected inflation, and the rising dwelling prices.

After a momentary wobble following the release of June quarter Consumer Price Index (CPI) reports, something that saw core CPI come in slightly ahead of expectation, the issue of inflation is a critical issue. The data suggests that inflation has risen slightly since the March quarter. However, while headline inflation is well below the RBA’s target band of 2 to 3 per cent over time, the RBA watches core inflation with the trimmed mean measure rising to 1.7 per cent over the year.

June Quarter Rates of Inflation

Data released by the Australian Bureau of Statistics (ABS) on July 27 suggest that while the CPI headlining rate is at just 1.0%, underlying measures have increased by 0.5% to an annualised pace of 1.7% – a higher figure than economist’s predictions.

The trimmed mean came in at 0.5%, compared to 0.2% in March. The weighted mean also rose by 0.4%, whereas March recorded 0.1%. Thus the two favoured measures of the RBA increased by 1.7% and 1.3% respectively year-on-year. This data suggests that there were some rises in costs over the period that were passed on to consumers.

While the latest CPI figures indicate that there has been a slight improvement in inflation, the bottom line is this rate is still below the RBA’s target of 2 to 3%. The RBA are also predicting that there will be little, if any, change in inflation for some time to come, which is prompting them to keep their cards close to their chest.

Property Market Update_670_320

Unemployment Rates

The seasonally adjusted rate of unemployment rose to 5.8% in June 2016 up from 5.7% which has held firm for the last three months. This rate is the highest since February with the economy adding 7,900 jobs to the market and unemployment increasing by 9,900 persons.

However, given that unemployment in Australia has averaged 6.94% from 1978 to 2016, and reached an all-time high of 11.10% in October 1992, the 0.1% increase is not a major concern for the RBA and more something they are keeping an eye on. This data coupled with the seasonally adjusted labour force participation rate, which came in at 64.9% – up 0.1% on May figures – suggests that employment is holding steady.

The Impact of the Brexit on the Australia Economy

The UK’s decision to leave the European Union (EU) is said to have been motivated by fear and emotion, rather than being economically fuelled. Britain has two years to negotiate a trade exit with the EU, and it expected that this would be favourable for both parties.

However, Britain’s move has sent shockwaves through the stock market with the ASX200 down a few% as a result. But the greatest impact has been seen in the value of the pound sterling – UK’s currency – which is now at its lowest level in some 30-years.

The Australia Housing Market

Recent reports suggest that the Australian housing market has softened, but it remains positive. While home prices in Western Australia are expected to continue falling, Victoria and Queensland are expected to have higher returns.

Nationally, home prices are projected to rise by 0.7% over the quarter. Over the next 2-years this price increase is anticipated to be around 1%, with Queensland home prices expect to climb by 1.8%, and Victoria by 1.4%.

Banks have been taking a conservation approach to lending, particularly for investment loans following APRA’s intervention to curb investor lending. Additionally, a potential oversupply of apartments, particularly in Sydney, Melbourne and Brisbane could cause property prices to drop.

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