Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 22 October 2014

As expected, soft inflation leaves door open for interest rate cut

Inflation softening

In happy news for borrowers but correspondingly bad news for savers, as discussed in my earlier post, inflation is weakening setting the scene for another possible interest rate cut in 2015.

The headline rate of inflation was just 0.5 percent and only 2.3 percent on an annualised basis.

On a seasonally adjusted basis, inflation printed at just 0.1 percent for the quarter and 2.2 percent on an annualised basis (click charts to expand).

The numbers were pumped up by a massive 15 percent rise in the price of fruit and an increase in the cost of new housing purchases, but as expected were offset by falls in the price of fuel and electricity, as well as a generally soft inflation picture elsewhere.

In terms of the core CPI print, the 0.5 percent expectation discussed this morning came in right on the money (actually rounded up from 0.47 percent if you drill into the figures, which interestingly is below the 2 to 3 percent target band when annualised). 

This is weak inflation. The preferred underlying readings are now down to 2.55 percent on average, and are falling.

Notably, the trend is now soft as the impact of the declining currency (exchange rate) washes through, so another 0.5 percent reading in December could bring the core reading down to around just 2.2 percent as the previously strong inflation data rolls off the annual reading.

In other words, by early 2015 the door is likely to be very much open for another interest rate cut, as previously noted here.

Market news - shares up, Sydney property prices booming

Share markets celebrated the news by jumping by 1.14 percent (XAO and XJO) which makes it seven positive trades in a row.

One of the factors which has been called out by the media as a potential hurdle to an interest rate cut has been rising property prices, but as I have written about here previously, there has only really been a property boom in Sydney, with dwelling price growth over the past four years soft almost everywhere else.

This was underscored today by the latest round of data for the September 2014 quarter from Australian Property Monitors (APM) which showed Sydney house prices continuing to boom as expected by another 3.8 percent in the quarter to be up 16.6 percent over the past year (median house prices up by a monster $120,000 to $844,000).

Affordability constraints will likely soon pull up house price growth in Sydney. 

Apartment prices in the harbour city rose by another 1.6 percent in the quarter, which was yet another very solid result.

However, APM recorded falling prices in most other capital cities for the September 2014 quarter with the worst performing cities including Adelaide (-1.0 percent), Brisbane (-1.3 percent), Perth (-1.5 percent), Canberra (-1.7 percent) and Hobart (-1.3 percent).

A small slice of humble pie to be eaten there by a few property market experts.

And if that is a brewing national property bubble which needs cooling, then it's an odd one.

The volatile and seasonal data for Darwin is typically all over the place, but prices are down 1.7 percent over the past year there too.


Inflation printed soft as expected with core inflation hitting on the nose at 0.5 percent, and interest rates could easily be cut again in 2015. 

While the Sydney property market remains imperiously strong, very weak property market data elsewhere given the stimulatory level of monetary policy settings does not seem to pose too much of a problem. 

The best performing capital city property markets in 2015 and for the next three years are expected to be those of Brisbane and Sydney, which is therefore where we will also be focussing our buying for investor clients.