Mortgage rates stay high for the foreseeable future, as global inflation worries continue

Mortgage rates stay high for the foreseeable future, as global inflation worries continue

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Over the past week we have seen the main banks raise their one year fixed mortgage rates to just below 7%. They’ve done this in response to increases in wholesale borrowing costs caused largely by developments offshore rather than any particularly fresh bad news on inflation here.

If anything, much of the local new data we have in hand are on the weak side for the economy. Credit and debit card spending fell away in May, commodity prices have eased, fresh fruit and vegetable prices have fallen, supply chains are functioning better, and businesses are getting slightly more relaxed about the availability of labour.

But in Australia inflation data recently has come in higher than expected.

The Reserve Bank there is expected to keep raising interest rates for a few more months. The same is seen happening in the United Kingdom though to a greater degree in response to much stronger than expected growth in employment.

Similarly, in the United States the growth in job numbers has recently exceeded expectations.

That means that even though inflation has fallen to 4%, wage-related risks still remain. The Bank of Canada also recently restarted its rate rise cycle and overall offshore there is a feeling that inflation is going to take longer to get back towards 2% than had been expected – or at least hoped for.

The opposite is happening in China, however.

The initial spurt in growth once Covid was allowed to spread through the population in December has faded away. People’s bonuses have been cut tremendously, house prices have been falling, and house construction has been severely weakened by an over-supply and widespread failure of developers to complete projects.

The population is rapidly aging, the unemployment rate for 15-24 year olds has risen above 20%, and export demand is falling away partly as the world weans itself off the Chinese economy. China's use of trade access as a weapon to influence policies in other countries has produced a backlash which is inhibiting China’s growth.

This holds implications for our economy.

Why? Because one-third of our export receipts come from China. The surprising weakness in China’s economy means we have to be cautious about our growth prospects for the next 12-18 months.

On top of that we have falling household spending in response to the sharp rise in mortgage rates underway (as people roll onto higher fixed rates), and due to the soaring cost of living.

But the weakness in our exports and household spending suggests that the chances of our central bank having to raise the official cash rate above the current 5.5% are not high. Equally however, with inflation still at 6.7% and uncertainty about the inflation impact of the government’s loosening of fiscal policy and the boom in net migration inflows, an easing of the official cash rate is unlikely until we are well into 2024.

This suggests that for the next few months scope for reductions in fixed mortgage rates is minimal. Hopefully, once we get close to Spring there may be some special offers from one or two banks, especially as opportunities for mortgage lending are growing as house prices show signs of having bottomed out.

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