Inflation at a 17 year low: What does that mean for rates?

The Australian Bureau of Statistics (ABS) has released its quarterly CPI data for June – and the annual inflation rate is at a 17-year low.

According to the most recent consumer price index (CPI) statistics released by the ABS, the fact that our official cash rate is already at an historic low may not be enough to boost consumer demand. The Consumer Price Index (CPI) rose just 0.5 per cent in the June 2016 quarter, following a fall of 0.2 per cent in the March quarter 2016. It brings that annual inflation rate to just 1 percent.

Over the June 2016 quarter, the most significant price rises and falls were as follows:


Price rises medical and hospital services (+4.2 per cent),
automotive fuel (+5.9 per cent) and
tobacco (+2.1 per cent)
Price falls domestic holiday travel and accommodation (–3.7 per cent),
motor vehicles (–1.3 per cent) and
telecommunication equipment and services (–1.5 per cent).

So will the RBA cut the official cash rate?

Lower-than-expected inflation raises the likelihood of the RBA cutting the official cash rate again. The minutes of the Monetary Policy Meeting of the Reserve Bank Board in June noted that bond yields had declined to historic lows in a number of major markets as well as in Australia; Swiss government bond yields were negative up to a tenor of nearly 50 years!

China appears to be slowing down, while GDP growth in the United States appeared to have picked up in the June quarter. Board members noted that, while the UK referendum decision was likely to have an adverse effect on the UK economy, it was too early to gauge the size of that effect.

On the domestic front, the Board noted that there had been relatively little new data on the Australian economy since the previous meeting, most of which had related to labour and housing markets. Overall, the available data for the June quarter were consistent with a moderation in GDP growth.

Have banks priced in a rate cut?

Looking at current fixed home loan interest rates of the products on Canstar’s database, the Canstar data suggests that one more cut of 25 basis points has already been priced in to many fixed-rate home loans.

Currently, based don the loans on Canstar’s database, the average 1, 2 and 3-year fixed rates for owner-occupiers are lower than the average standard variable and package variable rates. The lowest 1 and 2-year fixed rates are also lower than the lowest variable rates on offer. This suggests that many financial institutions are expecting another RBA rate cut or at the very least, no upward movement in the short or medium term. You can compare home loan interest rates here. Try a home loan calculator to see how much you could save with a cheaper interest rate.

Table: Residential Home Loan Market – Snapshot of the current market (28/07/2016)
Standard Variable Package Variable 1 Year Fixed 2 Year Fixed 3 Year Fixed 5 Year Fixed
Average 4.55% 4.36% 4.27% 4.17% 4.20% 4.64%
Min 3.59% 3.74% 3.65% 3.65% 3.67% 3.99%
Max 5.84% 5.35% 5.14% 5.09% 5.14% 5.49%
Source:, the search results do not include all home loan providers, and may not include all features relevant to you.

Term Deposit Interest Rates

While lower interest rates are good news for the minority of Australian households with a home loan, they are not good news for the many retirees and other savers. Currently on Canstar’s database, term deposit rates are as follows:

Term Min  Max  Average
30d                 1.45%                     2.65%         1.92%
60d                 1.70%                     2.75%         2.04%
90d                 1.70%                     3.10%         2.41%
180d                 0.92%                     3.01%         2.48%
270d                 1.70%                     3.10%         2.36%
1 Year                 1.85%                     3.02%         2.58%
2 Year                 2.10%                     3.10%         2.67%
3 Year                 2.10%                     3.20%         2.74%
4 Year                 2.25%                     3.10%         2.78%
5 Year                 2.25%                     3.15%         2.90%

Source: Based on products on Canstar database, the search results do not include all term deposit providers. Figures bases on a $50,000 term deposit.

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