Interest rates look set to stay put as inflation comes in under expectation

The national inflation figures came out yesterday and were slightly lower than expected with the consumer price index rising 0.6 per cent over the three months to March.

The weaker than expected figures could take pressure off the Reserve Bank to lift interest rates, who want to see inflation rise to their 2-3 per cent target.

Commercial banks think the economy is picking up however, and are going it alone by starting to lift their interest rates on longer term fixed mortgages.

Despite forecasts being a little off this quarter, economists are predicting inflation to jump over the next three-to-six months.

Sarah Hunter from BIS Oxford Economics spoke to the ABC.

“CPI will accelerate sharply in the June quarter, and likely print above 3 per cent,” she said.

“This will partly be a result of COVID-related disruptions in the second quarter of 2020, in particular the childcare subsidy that made care free for users.

“But we also expect to see a further rise in average fuel prices, lifts in the cost of some insurance products, and upward pressure on new dwelling costs as a result of commodity and labour shortages in the sector.

“Notwithstanding these one-off factors, core inflation is likely to remain weak for some time,” she told ABC.

“Wages growth remains subdued and demand for many services is still recovering to pre-pandemic levels, which will limit any immediate pressures on price.”

Chief economist at Indeed Asia Pacific also spoke to the ABC and said the RBA’s conservative measures of inflation were unlikely to rise sharply any time soon.

“Inflation is unlikely to settle consistently within the Reserve Bank’s 2 to 3 per cent target until annual wage growth improves to at least 3 per cent,” he said.

“Realistically that’s years away.”

With the RBA determined to keep interest rates where they are until inflation hits its target, commercial banks have already started raising their rates.

Sally Tindall, from RateCity, said Westpac’s latest move to raise longer-term fixed mortgage rates by 30 basis points to 2.19 per cent could be a sign the era of record low rates could be ending.

“This move from Westpac could be the end of an era for ultra-low four-year fixed rates,” she told the ABC.

“Westpac held out as long as it could, but with a cash rate hike on the cards in 2024 and the RBA’s term funding facility wrapping up in a couple of months, the bank’s record-low four-year fixed rate was unsustainable.

“While the majority banks’ three-year fixed rate changes are still cuts, rather than hikes, the tide could turn later this year as the economy continues to recover.”


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