LATEST INFLATION RATES

Does This Mean Lower Mortgage Rates?

With the recent economic reports making the rounds, we at Hills Accounting Hobart thought it would be the perfect time to take a closer look at what the numbers really mean for you, your wallet, and your mortgage. In simple terms, Australian inflation is still lingering higher than the Reserve Bank of Australia (RBA) would like, which probably means we won’t see interest rate cuts before the festive season. Let’s unpack why.

Main Inflation vs Underlying Inflation: What’s the Difference?

When we talk about inflation, we’re generally talking about how much the prices of goods and services are going up over time.

The target range for the RBA is to keep the annual inflation rate between 2-3%. This is considered a good inflation rate to preserve the purchasing power of money and encourage sustainable growth, which is good for everyone.

But not all inflation figures are created equal. There are two key types you’ll hear about: main inflation and underlying inflation.

Main inflation is the headline figure you often hear in the news, and it recently dropped to 2.8% at the end of the September 2024 quarter, which is back within the sustainable range the RBA requires. It includes all the changes in prices, whether it’s a sharp rise in fuel or a big drop in fresh fruit costs. This figure can be quite jumpy because it accounts for everything.

Unfortunately, underlying inflation (sometimes called core inflation) strips away the volatile stuff like fuel and seasonal food prices, giving a clearer picture of the general trend. Essentially, it’s the RBA’s favourite measure to keep an eye on because it’s more stable and a better guide for future monetary policy. The underlying inflation rate is 3.5% for the same period, which is still above the RBA's perfect scenario.

Why Did Interest Rates Start To Rise?

In March 2022, Australia's annual inflation rate hit 5.1%. This significant increase was driven by rising costs in areas such as housing, fuel, and food. The surge in inflation prompted the Reserve Bank of Australia (RBA) to start increasing interest rates in May 2022 to bring inflation back within its target range of 2-3%.

Between May 2022 and October 2024, the Reserve Bank of Australia (RBA) implemented 13 interest rate hikes. This series of increases brought the cash rate from a historic low of 0.1% in May 2022 to the current level of 4.35% in October 2024. These increases dramatically affected housing mortgage rates which, as an example, saw an increase in monthly repayments of around $1500.00 per month for a housing loan of $750,000.00.

According to realestate.com.au, one in seven homeowners may have to sell their home by February or apply for hardship unless interest rates begin to fall.

So, Will We See A Reduction In Interest Rates Anytime Soon?

While home owners are begging for a reduction in their mortgage costs with many struggling to meet the monthly repayments, the RBA is unlikely to reduce interest rates until the underlying interest rate falls back within 2-3% range.

Main inflation numbers have shown some signs of slowing, but the underlying inflation figure is proving a bit more stubborn. This means that while some costs are coming down, the general pressure on prices isn’t easing quickly enough. For the RBA, that’s a sign to stay cautious and keep interest rates steady (or even consider more hikes) to ensure inflation doesn’t make a surprise comeback.

What Does This Mean for Your Mortgage?

If you’ve got a mortgage, you’re likely wondering what all of this means for your repayments. In short, it’s unlikely we’ll see interest rates drop before Christmas. The RBA wants to be sure inflation is well under control before it relaxes its stance.

For homeowners, this could mean keeping a close eye on your budget for a little while longer and avoiding overcommitting financially. If you’re concerned about your mortgage repayments or just want to have a financial check-up, now’s a great time to speak with your accountant.

The Takeaway

Inflation can be confusing at the best of times, and the jargon doesn’t help! But understanding the difference between main inflation and underlying inflation gives us a clearer idea of why the RBA is likely to keep interest rates high for a bit longer. It’s all about staying on top of things and planning wisely for the months ahead.

For more tailored financial advice or just to chat about how these changes could affect your personal finances, get in touch with Hills Accounting Hobart today. We’re here to help make sense of the numbers.

Remember, this article is general in nature and doesn’t take into account your specific objectives, financial situation, or needs. For advice tailored to your circumstances, have a chat with us at Hills Accounting Hobart.

Email us today at [email protected] or call us on 03 62737800 For more information and updates check out Hills Insights