RBA set for a "flexible" 2016

The Reserve Bank left the cash rate unchanged in Feb this year, but did leave the door open for more accomodative policy over the next 12 months.

On the first Tuesday of every month except January, the Reserve Bank of Australia (RBA) conducts a board meeting to decide, among other things, whether to change the official cash rate. In February 2016 the RBA left the cash rate unchanged for the seventh consecutive month. The most recent cash rate move was in May 2015, with a 25 basis point reduction.

“Recent information suggests the global economy is continuing to grow, though at a slightly lower pace than earlier expected,” said Glenn Stevens, RBA Governor, when announcing the decision.

“In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.”

The Board did leave the door open to future movements though, observing that continued low inflation may provide scope for easier policy.

This was a decision accurately predicted by the Australian National University (ANU) RBA Shadow Board. RBA Shadow Board chair Dr Timo Henckel said turmoil in the global markets was causing headaches, but holding interest rates steady in Australia remained the best policy.

“It has been an awful start to the new year for people who have invested in shares. Global stock markets have seen falls of more than 15 per cent in places as investors worry about slow growth in China and over-indebtedness in emerging markets,” Dr Henckel said.

“Losses on the Australian share market are more modest but the Australian dollar has been caught in the maelstrom, temporarily trading as low as 69 US cents.”

Comparing home loans

Based on consumer behavior on Canstar’s database, it would seem that home buyers are not sure about the need for future interest rate cuts, with the percentage of visitors to Canstar’s home loan tables looking for a fixed-rate loan increasing by approximately 4.4 percent between July 2015 and January 2016.

In July 2015, just over 39% of Canstar visitors were looking for a variable rate home loan, but that percentage has now dropped to less than 35%, with a 2-year fixed loan increasing in popularity.

If you’re currently trying to choose between a couple of home loan deals, try out our Loan Comparison Calculator to help you crunch the numbers.

RBA may need to be flexible

The Housing Industry Association suggested that the RBA may need to adjust rates down later in the year if Australia experienced a sharper than expected slowdown in new home construction.

“A combination of factors, including tighter credit conditions and out of cycle increases in borrowing costs will see fewer new homes built in 2016 and a further slowing in the rate of growth in property prices in Sydney and Melbourne,” said HIA Chief Economist, Dr Harley Dale.

“A sharper than expected slowdown in new home construction this year would not be sufficiently offset by other sources of domestic demand … The RBA would need to cut rates further should that outcome eventuate.”

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