Deflation forces RBA’s hand

May 03, 2016

A drop in the Consumer Price index combined with falling consumer sentiment has encouraged the Reserve Bank of Australia to cut the official cash rate.

Today's decision not only marks the first time in 12 months that the official cash rate has been cut, but it means the cash rate is now sitting at the new historical low of 1.75%.

Mortgage Choice chief executive officer John Flavell said a spate of “less than impressive” economic data ultimately provided the Reserve Bank of Australia with the incentive they needed to cut the cash rate.

“Data from the Australian Bureau of Statistics found CPI fell 0.2% over the March quarter, pushing core inflation down to 1.6% - well below the Reserve Bank's target range of 2 – 3%,” he said.

“This was the first time since 2008 that we have actually seen a quarterly deflation result. Furthermore, the 0.2% drop in CPI was a far cry from the 0.2% rise that economists were expecting.”

Mr Flavell said the sudden and surprising drop in CPI combined with the 4% fall in consumer sentiment ultimately forced the Reserve Bank's hand.

“According to the latest Westpac- Melbourne Institute of Consumer Sentiment, confidence fell 4% to the point where pessimists now significantly outnumber optimists,” he said.

“Knowing this, it seemed the Reserve Bank had no choice but to cut the cash rate.”

Mr Flavell said the Reserve Bank would be hopeful that today's rate cut will give both consumer sentiment and the Australian economy a much needed boost.

“Of course, while the Reserve Bank of Australia has decided to cut the official cash rate, that doesn't mean to say Australia's lenders will pass rate reductions onto their customers,” he said.

“Over the last few months, we have seen many of Australia's lenders increasing their interest rates out of cycle with the Reserve Bank.  So, even though the cash rate has fallen, interest rates may not.

“The banks' may wait to see what the outcome of tonight's Federal Budget is before making any decisions regarding interest rates.”

Moving forward, Mr Flavell said he wouldn't be surprised to see the Reserve Bank of Australia cut the cash rate “at least once more” before the end of the calendar year.

“Regardless of what happens with rates in the future, now could be a great time for homeowners to review their current mortgage and make sure they are still in the right product for their needs,” he said.