You may have heard that the RBA is once again holding its horses when it comes to the official cash rate. But you probably missed the much bigger interest rate news one day earlier.
Every year, on the first Tuesday of November, Australians around the nation hold their breath in anticipation of the Rate That Stops the Nation.
This year it went exactly as expected: the RBA left the official cash rate on hold at its record low of 1.5% for a 15th consecutive month.
Good news, right? Well it gets much better for home owners.
That’s because updated figures released by the ABS on Monday will make it even harder for the RBA to raise interest rates before late 2019.
Hang on, why is that?
Well, new consumer price index (CPI) spending weights released by the ABS suggest that inflation will be 0.2 percentage points lower than otherwise expected over the next two years.
The CPI was reweighted to account for changes in consumer spending patterns in recent years. It’s a little technical, and we’ll explain in more detail further below, but it’s necessary to help economists keep a keen eye on the types of goods that are experiencing the most significant price rises.
It also means that the pace of inflation is more modest than what had previously been reported.
“This will make it even harder for the RBA to raise interest rates before late in 2019,” says Capital Economics, one of the leading independent economic research companies in the world.
“This may sound like a technical change that only economists are going to get a kick out of, but it could significantly influence what happens to interest rates and the financial markets.”
Westpac’s Senior Economist Justin Smirk explains further: “It is clear that the reweighting of the CPI will make it increasingly hard for the RBA to hit its inflation target in the medium term.
“The Australian economy just does not have the inflationary impulse in the sectors that are inflating (housing is the key here) to offset the disinflationary pressures that dominate the consumer retailing space.”
So will the RBA’s official cash rate remain at 1.5% until late 2019?
Well, not necessarily.
Here’s NAB’s take on the announcement: “NAB continues to focus on the prospect that the unemployment rate will begin to fall more quickly in coming quarters.
“This should see the RBA begin to gradually lift rates in the second half of next year as other central banks begin to move interest rates up from emergency low settings enacted after the Global Financial Crisis.”
Why the CPI reweighting?
Ok, we’re going to get a little technical here.
Capital Economics probably explains it best: “Inflation has been overestimated as the 2009/10 weights used for the past six years have not taken into account the tendency for people to shift their spending away from items rising rapidly in price.”
Some of those items include tobacco, health, childcare, education and insurance.
Then there’s also housing, funnily enough.
“This might be a bit counter intuitive given the surge in house prices we have experienced since 2011, especially in Sydney and Melbourne, but you have to remember that what the CPI measures is the cost of constructing a new home and it excludes land values,” says Westpac’s Smirk.
Where to from here?
Well, it looks as though the RBA is going to be stuck in the stalls for a while longer when it comes to that next interest rate rise.
What that means for you and your investment strategies will depend on your individual situation.
So come in and have a chat with us and we can discuss your plan in light of these developments.
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