4 min read
QUICK SUMMARY
- THE NUMBER: Headline inflation eased to 3.5 per cent in the year to July, but economists expected 3.3 per cent.
- THE RISK: Trimmed mean inflation remained elevated at 3.6 per cent, with services inflation running at 3.7 per cent.
- THE MEETING: Markets now price a 38 per cent chance of a rate rise on SEPTEMBER 29 and a 92 per cent chance by year-end.
- THE IMPACT: A further rise could add about $128 a month on an $800,000 principal-and-interest loan, or about $167 on interest-only.
- THE FIX: Stress-test your finances, review fixed-rate expiries and prepare your finance file before lenders become more cautious.
WHY THIS INFLATION PRINT MATTERS
Australia’s headline inflation rate fell from 3.8 per cent in June to 3.5 per cent in the year to July. That sounds encouraging, but the figure was still higher than the 3.3 per cent economists had forecast.
That gap matters because the Reserve Bank of Australia does not only look at whether inflation is falling. It also considers whether prices are declining quickly enough, and whether the pressure is broad or temporary. The latest data suggests inflation is still not falling fast enough for the RBA’s comfort.
The RBA’s preferred measure, trimmed mean inflation, held at 3.6 per cent over the 12 months to July. It was unchanged from June and above the 3.5 per cent forecast, indicating that underlying price pressure remains well above the RBA’s 2 to 3 per cent target band.
Services inflation is particularly important. At 3.7 per cent, it reflects costs such as wages, labour and domestic business expenses, which are generally harder to bring down than temporary goods-price movements.
Housing costs rose 5 per cent over the year, while food and non-alcoholic beverages rose 3.2 per cent. For households and businesses already managing higher operating costs, this is not abstract economic data. It is showing up in rent, labour, construction, insurance and everyday bills.
The Australian Financial Review’s report also noted that the RBA’s August board minutes warned that upside risks to the inflation forecast could crystallise and require further tightening.
WHAT THE RBA IS LIKELY TO DO
The next RBA monetary policy meeting is scheduled for SEPTEMBER 29. Following the inflation release, markets increased the probability of a rate rise at that meeting to 38 per cent, up from 18 per cent beforehand.
The probability of a rise by the end of the year has also climbed to 92 per cent, up from 58 per cent. That does not make a September move certain, but it means borrowers should treat the possibility seriously rather than filing it under “future me’s problem”.
A September increase would be the fourth rate rise this year. It would take the cash rate to 4.6 per cent, a level not seen since October 2011.
Economists are divided on timing. Deutsche Bank, Goldman Sachs, Bank of America and ANZ now forecast a rise by November, while NAB has placed its forecast under review.
Westpac and UBS are more cautious. Both argue that one monthly inflation result, particularly a July print affected by annual price changes, may not be enough to push the RBA into action. The central bank will also consider new data on economic growth, employment and household spending before making its decision.
Construction activity fell 2.1 per cent in the June quarter, compared with expectations for a 0.5 per cent increase. That may support a more patient approach, but it does not remove the pressure created by persistent services inflation.
WHAT IT MEANS FOR YOUR REPAYMENTS
To see the difference, look at an $800,000 loan on the average variable rate of 6.9 per cent. On interest-only, the monthly bill is $4,600. A 0.25 per cent rise takes that to $4,767 — an increase of about $167, because the full rise lands on the interest bill.
On a principal-and-interest loan over 25 years, the same rise adds roughly $128 a month. The increase is smaller because the loan’s amortisation recalculates: at a higher rate, less principal is repaid each month, and that lower principal component cushions the payment rise. The total payment is still higher than interest-only — about $5,731 a month — but the marginal increase is smaller.
Either way, it stacks up. Three earlier rises have already added roughly $376 a month to the example loan, so a fourth would push the total increase to about $504 a month on a principal-and-interest basis — before fees, insurance or other costs.
For Perth borrowers, the pressure can be more complicated. Western Australian households and businesses are already dealing with construction cost increases, trade labour shortages and uneven project timelines.
A business owner may be paying more for staff, materials and subcontractors at the same time as loan repayments rise. A property investor may be dealing with higher finance costs while deciding whether a property still fits their long-term strategy.
The key is to separate operational decisions from finance decisions. Whether you stay in a location or move is one question. Whether you lease or buy is another. Both should be assessed against cash flow, risk appetite and long-term objectives, rather than one short-term rate forecast.
FIVE MOVES TO MAKE BEFORE SEPTEMBER 29
STEP 1: STRESS-TEST YOUR REPAYMENTS
Model your repayments at a 4.6 per cent cash rate and allow for lender pricing, fees and your existing loan structure. Then test a second scenario where income falls, vacancies increase or business costs rise.
The goal is not to predict the future. It is to understand how much room you have before a rate change becomes a genuine problem.
STEP 2: CHECK YOUR FIXED-RATE EXPIRIES
If your fixed rate is due to expire, find out what rate you may move to and when. Do not assume your lender’s default variable rate will be competitive.
Reviewing options early may give you time to refinance, split your loan or restructure without making a rushed decision.
STEP 3: TIGHTEN YOUR WORKING CAPITAL BUFFER
Before lenders potentially tighten serviceability assessments, review your cash reserves, debtor collection cycles and upcoming commitments. A suitable Working Capital facility can help manage timing gaps, but it should support a sound business model rather than disguise a permanent shortfall.
STEP 4: GET YOUR FINANCE FILE READY
Clean financials can make a significant difference when lenders are cautious. For commercial applications, prepare recent entity statements, current financial accounts, signed lease schedules and details of existing debts.
Be ready to provide valuer access when requested by the lender. Valuations, entity checks and lender negotiations take time, so a complete file is usually stronger than a last-minute application assembled under pressure.
STEP 5: TALK TO A BROKER BEFORE THE MEETING
Speak with a broker while you still have negotiating room. A review could identify a better structure, a more suitable lender or an opportunity to refinance before your circumstances change.
This may apply to a home loan through Baseline Finance’s new home loan service, or to a commercial facility for property, equipment or expansion. Businesses considering a premises purchase can also explore Commercial Property Loans.
RISKS AND WHAT COULD CHANGE
A SEPTEMBER rate rise is not guaranteed. The RBA will assess inflation alongside employment, economic growth, household spending and the broader outlook.
Westpac and UBS are right to point out that one monthly result can be noisy. If later data shows demand weakening quickly, the RBA may decide to hold the cash rate at 4.35 per cent.
Do not fix every loan in a panic, over-borrow based on the worst-case scenario or assume today’s lender appetite will remain unchanged. Fixed rates can carry break costs, refinancing may involve fees and a new structure may not suit your future plans.
Professional advice should account for your personal goals, cash flow and risk appetite. A higher rate is inconvenient, but an unsuitable loan structure can be expensive for much longer.
TERMS TO KNOW
- Headline inflation: The overall change in prices across the consumer basket, including volatile items.
- Trimmed mean inflation: An underlying inflation measure that removes unusually large price rises and falls; it is closely watched by the RBA.
- Cash rate: The interest rate set by the RBA that influences funding costs across the financial system.
- Serviceability: A lender’s assessment of whether you can afford loan repayments after considering income, expenses, debts and an interest-rate buffer.
THE BASELINE DIFFERENCE
Baseline Finance provides jargon-free, transparent guidance for borrowers navigating changing market conditions.
We act as your single point of contact, managing the paperwork, lender discussions and application process. Our Strategic Funding Plan provides a clear, benchmarked roadmap built around your goals, typically within 7 days.
CONTACT BASELINE FINANCE
Phone: 08 6108 3925
