Could negative inflation keep rates on hold?

The Australian Bureau of Statistics (ABS) has recorded the largest fall in Australia’s Consumer Price Index (CPI) in its 72-year history, indicating that it may be some time before we start seeing interest rates rise.

The numbers 

The 1.9 per cent fall in CPI over the June 2020 quarter also means that Australia has seen an annual inflation rate of -0.3 per cent in the year to June 2020 – the first case of “deflation” since 1997/1998.

However, ABS chief economist, Bruce Hockman, said that if you discount the extraordinary circumstances of COVID19, including free childcare and significant price falls in automotive fuel and pre-school and primary education, CPI would have risen 0.1 per cent in the June quarter. 

Several of the CPI components that saw price rises reflect the ongoing effect of the pandemic keeping many Australians working from home and putting a stronger emphasis on hygiene:

• cleaning and maintenance products (+6.2 per cent)
• other non-durable household products, including toilet paper (+4.5 per cent)
• furniture (+3.8 per cent)
• major household appliances (+3.0 per cent)
• audio, visual and computing equipment (+1.8 per cent)

Additionally, rents recorded their first quarterly fall since the series commenced in 1972, thanks to lockdown restrictions and rising vacancy rates. According to Real Estate Institute of Australia (REIA) president, Adrian Kelly, this would normally be considered good news for renters, but “in the present circumstances the underlying reasons are of concern for all.” 

What does this all mean for you?

According to the RBA:

“Low and stable inflation reduces uncertainty in the economy, helps people make saving and investment decisions, and is the basis for strong and sustainable economic growth.”

“If inflation is likely to be too high for too long, the Reserve Bank Board would typically increase the cash rate to bring inflation back to the target. If inflation is likely to remain too low, the Board would typically lower the cash rate.”

However, RBA governor Philip Lowe has previously stated that the RBA intends to keep the cash rate on hold at the record low of 0.25 per cent until it sees employment figures improve and inflation hit a target rate of between 2 and 3 per cent.

If the cash rate is likely to stay low for the time being, interest rates on home loans and the like may also stay low. Several banks and mortgage lenders have been slashing rates and offering new incentives to help attract new customers, and many Australians have been refinancing in recent months.

However, it may also mean that interest rates on savings accounts and term deposits are less likely to rise, in tough news for savers.

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