Inflation hits two-decade high: What it means for your mortgage

This is a really good article by realestate.com.au discussing what is happening with Inflation and what is likely to happen with interest rates.  Lets hope that the international warnings about a global recession are heard by the Reserve Bank and they do not go too hard and end up hurting the Australian economy.

The cost of living has continued to grow as a perfect storm of factors drive prices higher, all but confirming another interest rate rise when the RBA meets next week.

The Consumer Price Index (CPI) rose 1.8% in the June quarter, pushing the annual rate to 6.1% – slightly below expectations, but still the fastest annual increase in more than two decades.

ABS head of prices statistics Michelle Marquardt said the result had been largely driven by housing and fuel prices.

“The annual rise in the CPI is the largest since the introduction of the goods and services tax [GST],” Ms Marquardt said.

“Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings.

“The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter.”

However the higher costs can be felt across the board.

Flooding along Australia’s east coast pushed up fruit and vegetable prices, while bread and breakfast cereals were affected by the war in Ukraine which has driven up wheat prices. Furniture, clothing and accommodation costs also rose.

Trimmed mean inflation, which strips out volatile or one-off price changes, rose 1.5% in the June quarter to be 4.9% higher over the year – the highest annual rate on ABS records and well above the RBA’s inflation target of 2-3%.

What it means for interest rates

Many borrowers have already seen their mortgage repayments rise as lenders pass on the latest rate hikes to customers with a variable home loan.

PropTrack director of economic research Cameron Kusher said Wednesday’s inflation data all but confirmed another increase when the RBA meets next week.

“Unfortunately interest rates are a blunt tool and while inflation remains well above target and rising, it is unlikely [the RBA] will do anything but lift rates,” Mr Kusher said.

It’s worth noting the latest inflation data is backward looking and only captures price changes in the three months to June. A winter spike in power prices, increasing rents and further growth in food costs are expected to drive inflation higher in the months ahead.

The RBA expects price growth will peak by the end of 2022, before falling back towards its 2-3% target range next year.

“The RBA has already indicated they expect that inflation will peak at 7% in the December quarter, so we can expect more hikes,” Mr Kusher said.

Forecasts of how high interest rates will go vary between economists, however the consensus is for another double-sized interest rate hike in August.

The RBA has raised interest rates from 0.1% to 1.35% since May, including two 50 basis point increases in both June and July – double the size of a regular rate rise.

Here’s what economists at the big four banks predict for the cash rate:

Here’s what economists at the big four banks predict for the cash rate:

CBA head of Australian economics Gareth Aird said there was still a chance the RBA may increase rates by a whopping 75 basis points.

“There are no two ways about it – inflation is red hot in Australia right now, as it is in many parts of the world, and the RBA will respond by raising the cash rate again at the August Board meeting next week,” Mr Aird said

“Our central scenario for the RBA to raise the cash rate by 50 basis points at the August Board meeting is unchanged.

“Note the risk still lies with a bigger hike, i.e. between 50 and 75 basis points, albeit we consider that risk to be low.”

ANZ economists, who expect the cash rate to reach 3.35% by year-end, said the strong labour market will continue to add pressure on the central bank.

“The target cash rate is still well below the RBA’s estimates of neutral, and we expect the labour market to continue tightening,” ANZ senior economist Catherine Birch said.

“As such, we maintain our 3.35% year-end forecast.”

Housing slowdown to accelerate

Mr Kusher said higher interest rates haven’t always caused property prices to fall, however in this case, he expects they will.

“We’ve seen interest rates fall for 11 years, price growth has surged over the past two years and there was an expectation that rates wouldn’t rise until 2024. Now they are rising sooner and much more rapidly than anyone expected,” Mr Kusher explained.

“Higher rates reduce borrowing capacities and force people to reduce their discretionary spending and dedicate more of their income to their mortgage, and we expect that this will push prices lower over the coming period.”

Since the March peak, PropTrack data shows home prices have fallen 0.5% nationally.

New forecasts released in the PropTrack Property Market Outlook see prices falling 2-5% by the end of this year, and a further 7-10% by the end of 2023.

Originally from realestate.com.au