- 6 Oct, 2015

The Official Cash Rate On Hold and Clinched Until 2016

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eChoice RBA Commentary for October 2015

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

This decision was based on:

o The Australian stock exchange experiencing instability;

o Australian commodity prices falling;

o Equity markets being unstable;

o Growth being below expected levels; and

o The Australian dollar’s value adjusting.

Polls of economists views have been running hot. In the blue corner, are those who feel that the official cash rate will remain on hold for the rest of 2015 and most of 2016. In the red corner, are the economists who are suggesting that banks will start to raise rates, regardless of the RBA’s decision. So just who will win the fight?

The official cash rate remained on hold at 2% for the fifth consecutive month. But, there’s unrest amongst economists. While the majority feel that the official cash rate will stay on hold for some time, there are others who are speculating that it will either fall, or even possibly rise.

Global Economy

Undoubtedly, most of the speculation over where the Australian economy is heading hinges on China and its faltering economy. However, some economist say that many are over-reacting to events that have unfolded in China, as the Chinese government are taking steps to rectify their economy’s instability by rolling out stimulus packages.

Further on the global front, the economy is expanding, but its pace is only moderate. Issues with China and the Australian stock exchange have created instability, but the US market continues to improve. Therefore, it is expected that the Federal Reserve will begin to raise its policy rate in the near future.

Australian commodity prices have fallen when compared to prices from 12 months back. While this is due to an increased supply, trade terms in Australia are also starting to fall. At present the non-mining sector is keeping the Australian economy balanced, which is enough to keep the RBA happy. But as support for the housing market subsides this may change.

Equity markets are still volatile. This is mainly attributed to China. However, most other markets are stable. Borrowing rates remain low, and global financial markets are remaining steady, which is a good sign.

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Australian Economy

On the Australian front, economic conditions continue to improve. Growth remains steady, but is still below long-term forecasts. Employment is continuing to improve with the unemployment rate remaining consistent. It is anticipated that the economy will continue to improve as inflation has been contained and is expected to remain on target over the next 12 to 24 months, even if the Australian exchange rate falls.

Given these conditions, monetary policy it expected to continue to be accommodating. Low interest rates are supporting both borrowing and spending. Credit growth has eased with moderate levels of growth being recorded and lending growth in the housing market remains strong. Home prices in Sydney are continuing to rise even though trends are easing in other cities. However, auction rates are indicating that even Sydney property maybe starting to lose its momentum.

Housing market data indicates that changes to lending guidelines by the Australian Prudential Regulation Authority (APRA) are beginning to have an impact. This may see the Australian housing slow further and over-inflated home prices adjust.

In addition, the RBA is continually working with regulators to minimise lending risks. Commercial property prices in terms of equity have fallen and this sector has experienced some volatility, especially when compared to global markets.

The Australian dollar’s value is adjusting, especially in relation to commodity prices. It is expected that the dollar’s value with remain relatively consistent, though there is room for movement.

Economists are suggesting that the RBA will continue to monitor the impact that its two latest rate cuts, made in February and May, have on the Australian economy. Improvements in the labour market and a lower Australian dollar have contributed to the RBA’s decision to leave rates on hold.

A steady unemployment rate and a labour market that remains consistent indicates that there is no need to change monetary policy at present. The RBA are also continuing to monitor business and consumer confidence to see if lower interest rates have encouraged spending.

In terms of what the future holds for rates, opinion polls suggest that 75% of experts expect the cash rate to remain at 2% for the rest of 2015. While 16% predict that the official cash rate will drop by the end of 2015. There is some chatter about a rate rise, but this view is held by very few economists. Many are suggesting that the official cash rate could fall to 1.75 by mid-2016.

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Home Buyers

For those who are looking to buy a home then entering the market now represents a good time to buy. However, it’s important to budget for rate changes, when calculating how much you can afford to borrow, as this allows you to be prepared for interest rate increases should they occur. Experts suggest that having a 2 to 3% buffer to cover costs should cover you adequately.

59% of real estate experts said that they expect this season and the 2016 season to be similar, with little change. Plus, given that rates are low, buying now could save you more.

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

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