The Australian Bureau of Statistics said the consumer price index fell by 0.1% in the December quarter - the lowest quarterly reading on inflation in almost eight years. The annual inflation rate fell from 3.9% to 3.3% - a range closer to the Reserve Bank of Australia's target band of 2-3%. The lower-than-expected consumer price index data caught economists by surprise as the majority were expecting a 0.20% increase for the same period.
The upbeat inflation data is boosted by the dramatic drop in the cost of petrol prices and bananas, which have skyrocketed in the last year. In the December quarter, petrol prices dropped 12.4%, while fruits fell 5.2%.
"This is a tremendous result on inflation and means that interest rates have now peaked," said Craig James, chief economist with CommSec. "With inflationary pressures in retreat, the good news is that the Reserve Bank of Australia will be in a position to cut rates if the economy starts to flag."
James predicted that with interest rate settings on hold, a recovery in the housing sector is a real possibility in the second half of the year. "Up until now, there has been little need for investors to consider asset classes apart form equities. But the property market is now looming larger, especially with rents soaring and the prospects of higher property prices in the coming year."
However, James warned homebuyers to be cautious when reassessing their mortgages in light of the current interest rate environment. "Borrowers should consider their personal situations rather than trying to predict interest rate changes," he said. "Whether rates are expected to rise or fall, it is always best for borrowers to factor in a worst-case situation of higher rates - at least a 25 basis point rate hike. If your job is less secure, then fixed rates appeal, particularly at current interest rate levels (7.35% fixed 5 years, vs 8.05% standard variable). You may also consider fixing part of your loan with the rest variable to effectively hedge the interest rate risk," James added.
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