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Why we're looking at an August interest rate cut

Tuesday, 7 Jun 2016 12:52:10 | Thuy Ong

The RBA meets on the first Tuesday of every month excluding January. (AAP: Joel Carrett)

Interest rates have been kept on hold today but economists are predicting we will see a cut in August and there's one figure due out in July that could make all the difference — inflation.

Why were rates left on hold?

We haven't seen any movement today because it's likely the Reserve Bank of Australia (RBA) is waiting for the latest inflation figures which are due out on July 27.

Why are economists already predicting a cut in August?

Those figures are for the quarter to June and they'll give the RBA a clearer picture of just how much goods and services are costing Australians.

The next sitting of the RBA board would then be the August meeting.

According to economists polled by Bloomberg, it's then that we could be in for a cut of 0.25 per cent from 1.75 per cent to 1.5 per cent.

What makes those inflation figures so important that could drive an interest rate cut?

The RBA wants to keep inflation at a rate it believes is ideal to support economic growth and to maintain price stability.

Specifically, they want to see it between 2 and 3 per cent. Now keep this mind.

The RBA cut interest rates in May after surprisingly weak inflation figures for the March quarter saw consumer prices fall for the first time since 2008.

In that quarter, inflation came in at - 0.2 per cent, and an annualised rate of 1.3 per cent.

Remember that target of 2 to 3 per cent? Those March figures are well below what the RBA wants to see.

We seem pretty certain about an August cut. Why is the RBA waiting?

Well the March quarter inflation figures were surprising, prompting the Reserve Bank to cut interest rates in May to 1.75 per cent.

Economists may predict what they think the figure will be, but there's no definite until the Bureau of Statistics releases the latest figures on July 27.

We know the weak inflation figures for the March quarter led to May's RBA decision, and the price of fuel was the biggest driver behind that CPI drop.

Bowser prices had been tumbling for months and were down 10 per cent for the first quarter of the year.

So, if my bread, milk and petrol are cheaper, is my home loan about to be more manageable?

Not necessarily. Even when the RBA cuts interest rates, it's up to your bank to pass on those cuts to you.

Chances are they may not fully pass that on.

In May, three of the big four banks did pass on the full rate cut, which would mean a $43-a-month saving on a 25-year, $300,000 mortgage.

Is there anything else looming on the horizon that's likely to make a difference?

A lot of factors can influence the RBA's decision to cut rates. These can include indicators like the unemployment rate, GDP growth, inflation and the strength of the Australian dollar.

GDP growth came in surprisingly strong last week, and that's one of the reasons why economists were expecting the RBA to leave rates unchanged.

AustraliaPlus


 

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