The headline CPI (consumer price index) rose 1.2 percent this June quarter, sparking concern among economists that interest rates could soon head north.
As the official measure of Australian inflation – and a key indicator for dictating the Reserve Bank of Australia’s (RBA) decisions on setting interest rates – this quarter’s CPI hike does not bode well.
The CPI index, compiled by the Australian Bureau of Statistics (ABS), measures changes in the price of household goods and services based on a fixed ‘basket’ of goods that is assessed each quarter.
Interest rates have remained steady at 6.25 per cent since November 2006, however a rate rise, according to economist reports in most daily papers, is on the cards sometime this year.
While many are bracing for a rate rise at some point this year, the question is how will the latest CPI index figures impact on rates in the near future?
Tim Brown from Macquarie Bank remains unflustered. He told Mortgage Business that while the 1.2 per cent increase for the June quarter is certainly higher than most analysts predicted, with no surge in property prices “this number sits within an acceptable range by RBA standards”.
There’s little doubt that a rate rise will dampen an already sluggish market, the question is, which sectors will be hardest hit?
“A rate rise would affect the lower end of the market under $500k, which is traditionally a first home buyer market. Mortgage managers and originators would be affected as their customer segment traditionally comes from the first home buyer market” says Brown.
Good for business
Geoff Wilson from Wilson National in Queensland agrees that a rate rise would have a significant impact on lower-end borrowers, where they might be expected to pay as much as an extra $70 a month in loan repayments.
But how much of a dent a rate rise would put in mortgage managers’ business is debatable, according to Wilson.
“Speculation, or even a rate rise itself, can be great for business because it gets customers thinking about their mortgage, and whether they’re getting the best service and deal possible. Traditionally we’ve found that this type of media coverage on rates actually generates more business.”
Cut clothes according to your cloth
Brown suggests that in the current climate of uncertainty, mortgage managers and originators should set their sights on the market sectors that are most likely to remain buoyant, regardless of interest rate movements.
He points out that with shrinking vacancy rates and supply of new housing not meeting demand, investors will be “one of the few groups that will be able to afford to pay higher rates while still achieving a better return than the last few years as rents rise”.
While the recent CPI increase will fuel speculation that next month heralds a rate rise, Brown – like many other industry professionals – remains confident that the RBA will wait for firmer proof before bumping up rates.
“The RBA will look for more evidence that the property market is warming up before lifting rates at this stage,” he says.
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