Article published 06 October 2021
Inflation and interest rates
In Australia the inflation target and cash rate are both managed by the Reserve Bank of Australia (RBA), making the relationship between the two very close. The cash rate is used to restrain or energise economic activity to ensure that inflation is consistent with the target of 2-3%. If inflation is higher than this target for a long period of time, the RBA is more inclined to raise the case rate.
Over the past 3 years the inflation rate has been under the target of 2-3%, and this aligns with the cash rate and home loan market also seeing decreases and reaching record low interest rates in 2021. Despite inflation jumping to its highest level since Q3 2008 in June 2021, as the economy is still recovering from the impacts of COVID-19, the cash rate is expected to remain low, as a means to continue to stimulate the economy.
How does inflation affect interest rates?
Inflation can affect home loan interest rates as the RBA cash rate is used to determine the rate at which lenders pay to borrow funds from other lending institutions. Therefore if the RBA increases or decreases the cash rate to align Australia’s inflation rate with its target, it is likely to have an influence on your home loan interest rate.
If you have owned your property for a few years, it may be time to review your home loan to make the most out of the current inflation and interest rate situation and find out if you’re receiving the best deal. You can speak to your local Mortgage Choice broker who can go through your situation and ensure you have the right loan for you.