Inflation set to level out in 2023 – but more interest rate pain likely

Australian mortgage holders should prepare themselves for more pain this year, with experts predicting another interest rate rise when the RBA meets next month.

The Big Four banks expect the RBA to raise the cash rate by at least another 25 basis points, which would mark the ninth consecutive rise since May last year, and the highest peak since 1990 at 3.35 percent.

The Reserve Bank has been raising the cash rate in a bid to combat rising inflation, which currently sits at 7.8 percent, the highest level since 1990. The Australian Bureau of Statistics points to more expensive domestic holidays, international travel and higher energy prices as some of the key drivers.

While some have expressed concern that further interest rate rises could be enough to push Australia into a recession, head of research at CoreLogic, Eliza Owen, says there’s not too much cause for alarm just yet.

In the CoreLogic Property Pulse Report released this week, she points out that the RBA predicted inflation would peak at 8 percent this year and that the signs of a coming decline in the rate of inflation are already there.

“Underlying core inflation (the RBA’s preferred reading on inflation), which is measured by trimming excessively volatile components of CPI, actually fell in the quarter, from 1.9 percent in September to 1.7 percent,” she said in the report. 

“Annual core inflation is still a long way from the 2 to 3 percent target range set by the RBA, at 6.9%. However, December marked the first fall in quarterly core inflation since March 2021, following eight consecutive interest rate rises from May 2022.”

The result, she said, is that inflation may have already peaked. 

“Inflation across the combined OECD slowed to 1.8 percent in the September 2022 quarter, after peaking at 2.1 percent through June,” she said. “Forecasts from the OECD also suggest a fall in inflation through 2023 across most major economies, as global economic demand starts to slow.”

This includes Australia’s major trading partners such as China, Germany, Japan and the US.

In better news for those looking to renovate or build this year, the report also says that housing metrics indicate the rate of growth in new build costs is slowing.

“December CPI figures showed housing costs were still up a substantial 1.9% in the quarter, but this was down from a 3.2% lift in the three months to September,” Ms Owen said.