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How inflation rate affects your home mortgage

WHAT does the price of poultry, petrol and postage stamps have to do with your mortgage interest rate?

Plenty, and it’s more important than many people think. That’s because these goodies — along with alcohol, clothes, education and more — help make up Australia’s Consumer Price Index, which is the biggest single driver of the direction of mortgage rates.

Last month’s Australian Bureau of Statistics data put annual CPI inflation at 1.7 per cent, which is good news for property owners and investors. If inflation moves above three per cent, interest rate rises become more likely, while when it’s below two per cent there’s a bigger chance of a rate cut.

That’s because the Reserve Bank of Australia, which sets the official interest rate, aims to keep inflation between two and three per cent to, it says, “encourage strong and sustainable growth in the economy”.

It’s a bit of a crude lever, but the idea is that raising interest rates puts pressure on households to stop spending money, so businesses won’t jack up prices. Cutting rates encourages us to shell out more, accelerating price rises.



Low inflation has helped keep interest and as a result mortagage rates down. Source:Supplied


Australia’s continuing low inflation environment has allowed the RBA to keep the official interest rate steady since May last year, and RBA governor Glenn Stevens said this month that there may be scope for further cuts.

“With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two,” Stevens said.

Within Australia’s CPI index there are some big swings, but it balances out overall. Health, education and alcohol costs are up more than 5 per cent over the past year, but transport and communication costs fell, and clothes and food prices barely moved.

Inflation is important but it isn’t everything. To quote iconic Aussie real estate movie The Castle, it’s also about “the vibe”.

The RBA is always looking to the future, trying to predict where inflation will head and stay ahead of the game. A global shock may prompt it to act quickly, before inflation figures start changing.

Interest rates also affect the Aussie dollar’s exchange rate, which annoys travellers when it falls but is good news for just about everyone else, especially exporters and tourism operators.

Recently there have been some bad vibes coming from banks, which increased mortgage rates independently twice last year — once for investors only and then once for everyone — blaming tougher regulatory requirements.

Some forecasters believe the banks will do it again in the coming months, or at least keep some of any future RBA cuts.

While it’s frustrating for borrowers to see rates rise for no apparent reason, rest assured that they won’t keep climbing forever. Competition is too tough and customers are becoming more willing to switch lenders if they’ve got a bad deal.

That leaves inflation as your best measure for guessing where your mortgage rates will go, so keep an eye on consumer prices.

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