Home News As inflation soars, are interest rates set to rise?

As inflation soars, are interest rates set to rise?

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Nila Sweeney
The Reserve Bank kept interest rates on hold at 4.75% this week, but how long will it be before skyrocketing inflation forces their hand?
 
Borrowers were thrilled when the central bank confirmed it would not lift interest rates on Tuesday, although it didn’t come as too much of a surprise. The decision was largely expected, with the surging Australian dollar – which some pundits predict will hit $1.15 in the next few months – keeping a lid on things.
 
It was inflation data released in April that caused concern, however, as it confirmed that the Consumer Price Index (CPI) rose sharply in the March quarter, up 1.6% – four times the December increase of 0.4%.
 
The ABS figures represented the largest quarterly CPI rise since June 2006, and sparked fears that the Reserve Bank may look at increasing interest rates to quell inflation. Fortunately for mortgage holders across the country, that wasn’t the case.
 
Real Estate Institute of Australia (REIA) president David Airey pointed out that much of the CPI increase for housing, which rose by 1.3% for the quarter (almost double December’s figure of 0.6%), is still at its lowest since September 2007.
 
He added that the RBA should take into account the big jump in the cost of fruit and vegetables, which should be seen as a one-off occurrence following this year’s flood and cyclone damage.
 
“The message for the RBA is clear; rates do not need to be increased,” he said.
 
“Increasing rates will only cause greater mortgage stress for home owners and discourage buyers.”
 
Still, the Reserve Bank is facing a myriad of inflationary pressures, particularly as federal treasurer Wayne Swan is predicting the economy will add 500,000 extra jobs over the next two years, bringing the jobless rate down from 4.9% to 4.5%.
 
It’s prompting many variable rate borrowers to consider fixing their loans, as they prepare for one or even two interest rate rises in the second half of 2011.
 
It’s interesting to note how banks and lenders are reacting to recent data, however. For instance, NAB are clearly not expecting rates to increase any time soon, as they recently reduced several fixed rate products, including their 2-year rate (down from 7.39% to 7.29%) and their 3-year rate (down from 7.55% to 7.39%).
 
Furthermore, with market conditions fluctuating at such a pace, it may pay off to simply ride out the storm.
 
“Interestingly, we’re starting to see a slight decline in the average variable interest rate [on offer at present]. This is a reflection of the increase in competition that I am seeing amongst our panel of lenders. As the number of home loans being taken out in Australia continues to decline, we’re finding that our lenders are now fighting for a bigger slice of a smaller pie,” says Linda Clucas, personal mortgage advisor with Smartline.
 
"As at the close of business on Friday (April 29), the ‘Futures Market’ was implying that rates will remain on hold until at least June, which is good news for anyone with a variable rate mortgage."

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