Three economic factors under RBA’s radar for a prospective interest rate cut

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Australian Economy, Uncategorized

 

The updates coming from the Reserve Bank of Australia (RBA) relating to a probable interest rate cut in the month of August 2016 based on their July meeting, hinge on three key economic factors. These entail review of current month’s inflation data, housing data and labor data such that the RBA would be able to assess better about any changes required with regard to the rate cut policy. The July board meeting resulted into no change in the interest rates, which are maintained at a record low of 1.75 per cent as that of May. RBA’s stance, as understood by the market at large, on the three economic factors goes as herein below:

Inflation: The current scenario in Australia reveals a low inflation environment which in turn affects buyers’ sentiments given the purchases being put off. This comes at the back of having a view that prices might undergo a further reduction. This results in lower growth thereby affecting interest rate. There are speculations that RBA might bring a further cut by 25 basis points to 1.5 per cent or even as low as 1 per cent if the underlying CPI rises by 0.5 per cent or less over the quarter. There are news doing the rounds that RBA might not be seeing their expectations (target of maintaining inflation between 2 percent and 3 percent in the medium-term) being met about underlying inflation measures. Inflation drop below the target band and forecasts seems to be the topic of discussion.

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Inflation trend (Source: Reserve Bank of Australia)

Housing data: It has been indicated that housing data might not change RBA’s view that conditions would moderate. Particularly, RBA’s last meeting did not indicate any impact relating to May’s rate cut on housing markets. RBA reportedly notices that new construction with regards to supply of apartments particularly, is a deterrent to future price growth. There is a sluggishness in housing churn given the easing in housing credit growth. The market activity might have gone down in a way by the State Government changes to stamp duty on foreign investor purchases of residential property. However, RBA is still keeping a note of the housing market performance.

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Housing Prices (Source: Reserve Bank of Australia)

Labor market: Thought RBA has indicated a look into the labor market as a decision-making factor for interest rate cuts but experts believe that the recently released labor market report might not have a significant impact. We do witness a slow growth when it comes to job creation as opposed to what we saw in year 2015 but recent employment data has been relatively moderate with job creation continuing and the unemployment rate remaining around two-and-a-half year low levels. Given the entire scenario, the sentiment towards labour markets still looks subdued.

Overall, upcoming inflation data release for June Quarter will put the bolts in place and indicate about RBA’s probable call in its August meeting.

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