RBA likely to wait until at November to cut rates again

rba-interest-rates

By Larry Schlesinger

The Reserve Bank is likely to wait until November to cut interest rates again, according to the Commonwealth Bank’s chief economist Michael Blythe, following today’s benign June quarter inflation rate reading.

The CBA had previously forecast a 25 basis point rate cut in August.

Blythe described the CPI June quarter reading of 0.5% as a “touch below market expectations” with the underlying CPI print (0.6%) in line with the market and the Commonwealth Bank’s own forecasts.

“But whatever way you cut up today’s data the bottom line is that underlying inflation at mid-year was travelling at around 2%pa, the bottom end of the RBA’s target band.

ANZ prepared this graph showing how underlying inflation has tracked within the RBA’s targeted inflation band (2% to 3% since 2011):

underlying_inflation

Blythe  says the inflation reading leaves scope for the RBA to cut interest rates “if necessary”.

“That said, there is a pretty clear theme in recent RBA commentary.”

“That theme is a lot of policy stimulus that has been applied over the past six months or so and now is the time to see what impact that stimulus is having.”

“RBA Governor Stevens, for example, noted in the Q&A session following yesterday’s presentation at the Anika Foundation that “we think the setting’s about right for the circumstances we face”.

“As a result the 25bpt rate cut we had pencilled in for the August RBA board meeting looks unlikely.”

“We have pushed that cut back to November. The projected cut reflects the downside risks to the economic outlook that remains.”

“Much will depend on how the European story plays out. But lower rates may also prove necessary in an economy adjusting to the end of a terms?of?trade boom and downward correction to export prices,” says Blythe.

Today, on the back of the inflation reading and Glenn Stevens’ well-received speech on the economy and housing market, Aussie Home Loans chairman John Symond came out in agreement on the RBA Governor’s position on the state of the Australian housing market.

“Repayments are now at their lowest in years on the back of low interest rates, income growth and lower house prices and loans sizes,” says Symond.

“I particularly endorse the RBA’s optimism and agree that arrears have remained low or have even seen some decline in the last year, while house prices are now somewhere around their 2004 levels. The likelihood of the so-called ‘bubble’ bursting seems low, in my opinion.”

“Now really is an opportune time for first home buyers to consider getting in to the market, especially with the chance of further rate drops in the coming months. Both variable and fixed rates look appealing, and with an increase of houses on the market combined with positive economic indicators, it provides a great environment  to invest in your own place rather than pay someone else’ s rent if you can afford it.”

Source: Property Observer

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