CPI rise could be inflection point

Reserve Bank of Australia governor Philip Lowe has consistently maintained his long-held view that the cash rate will not be lifted before 2024. But borrowers need to be vigilant, especially those plunging into overheated segments of the buoyant real estate market. Dr Lowe has reiterated that the cash rate will not be increased until inflation is sustainably within the 2 to 3 per cent target range. Consumer Price Index figures released on Wednesday were higher than expected, with the underlying inflation rate edging up into the target range at 2.1 per cent for the first time since 2015. Rising fuel costs, higher building costs and supply bottlenecks were largely responsible for the increase.

On Thursday, RBA deputy governor Guy Debelle said the central bank was on guard against an unwanted inflationary outbreak. “We are looking to generate a little higher inflation than we’ve had over the past five or six years,” Dr Debelle told a Senate committee hearing. “A little bit more inflation is welcome, but a lot more inflation is not welcome.” Much will depend on wages growth. While some workers were gaining solid pay rises in “hotspots” in the labour market, the question was how widespread this was and whether stronger wages growth represented a one-off “level change” as a result of the pandemic, Dr Debelle said.

Some economists regard this week’s strong CPI figures as an “inflection point” that presaged an earlier tightening of monetary policy. CBA head of Australian economics Gareth Aird brought forward his estimated timing for a 0.15-percentage-point rate hike by six months to November 2022. A lift in inflation and wages pressures had been slow to emerge but that would change from now on, Mr Aird said, after the fiscal splurge financed by money printing and remarkably high vaccination rates leading to a faster-than-expected easing of Covid restrictions boosting economic activity.

In the fastest growth surge since 1989, house prices have soared 20 per cent over the past year. Some sections of the market have overheated far above that average, however. Earlier this month, APRA told banks to lift the interest rate buffer they use when assessing home loans to at least 3 per cent above the loan product rate, up from the current 2.5 per cent commonly used by the banks and credit unions.

It was a prudent move, making it harder for over-committed borrowers to take out loans and avoid the possibility of negative equity in the event of a fall in real estate values when interest rates finally go up.

Caveat emptor.