Predictions from the International Monetary Fund indicate that Australia will have the second-highest rate of inflation in the advanced world this year (after Norway), with prices expected to rise by 2.1%.
That increase can be compared with the 0.7% average price rise expected across the advanced world (double the rate of inflation for 2015). Australia has achieved economic growth at a rate of 3%, bucking international trends, partly down to underlying inflation and benchmark interest rates of 2%.
Commentators had suggested that a fall in the rate of inflation could trigger a further reduction in interest rates from the
RBA, yet that is now unlikely following the IMF’s projections. Even if inflation were to fall, such cuts in rates appear to be off the table in the wake of
RBA governor Glenn Stevens’ comments last week that “we are reaching the limits of monetary policy”.
When asked by
Australian Broker how the IMF’s forecast relates to the home loan market, Martin North of Digital Finance Analytics said that higher mortgage repayments are a strong influence on rates of inflation.
“Inflation is calculated from a basket of goods and services including property (mortgage repayments and rents),” said North. “In fact, mortgage repayments have been growing because the average mortgage has been getting bigger in the past few years, despite record low rates. However, since banks have been forced to strengthen lending standards we have noted a fall in the average size of new loans – flowing through to lower repayments, so lower inflation metrics.”
The record low rates will sustain demand for property and growth in home prices, says North, which is good news for brokers. However, he warns that static levels of income may “act as a brake on strong home price growth”.
“Household debt has never been higher,” said North, “and this continues to stoke inflation. No problem, so long as employment rates and interest rates stay put. If either were to rise - unlikely in my view - all bets are off. I also do not expect rates to fall further unless there is an external shock.”
