INFLATION NATION: Why your mortgage is set to go up with prices surging even before Omicron crisis

The chance of an early interest rate rise has increased with inflation now well above a key target – even before the Omicron surge.

The consumer price index climbed by 3.5 per cent in the year to December, the Australian Bureau of Statistics revealed on Tuesday.

While that is only half the US inflation rate of 7 per cent, itself a four-decade high, this was well above the Reserve Bank of Australia’s longstanding 2 to 3 per cent target.

In a sign of more pain for Australian consumers, transport costs soared by 12.5 per cent in 2021, with the figures taken as diesel motorists before Christmas struggled to find the AdBlue additive necessary for modern trucks, utes and four-wheel drives to start.

The underlying measures of inflation, stripping out big price movements, were also on the high side of the RBA’s 2 to 3 per cent target. 

The weighted median measure of inflation, based on consumer goods in the middle of the price changes chart, rose by 2.7 per cent.

Westpac is now expecting the Reserve Bank of Australia to raise the cash rate from a record-low of 0.1 per cent to 1.75 per cent by early 2024.

The bank’s chief economist Bill Evans is expecting six interest rates rises, in August 2022, October 2022, March 2023, June 2023, December 2023 and March 2024.

This is despite Reserve Bank Governor Philip Lowe repeatedly promising through much of 2021 that rates would not be raised until 2024 ‘at the earliest’.

Westpac is now expecting the Reserve Bank of Australia to raise the cash rate from a record-low of 0.1 per cent to 1.75 per cent by early 2024

It would also mark the first official rate increase since November 2010, shortly after the Global Financial Crisis.

Should Westpac’s forecasts come true, someone paying off a typical Australian home would be paying $513 a month extra in mortgage repayments. 

In 2021, the median price of houses and apartments together rose by 22.1 per cent to $709,803, with the CoreLogic data showing the fastest calendar year increase since 1989.

With a 20 per cent deposit, a borrower buying a mid-price home in Australia would owe the bank $567,842.

This borrower with the Commonwealth Bank, Australia’s biggest home lender, would now be paying off $2,212 a month with a 2.39 per cent variable rate.

Should that rate increase by 1.65 percentage points to 4.04 per cent, repayments would rise by $513 a month to $2,725.

That is also assuming the banks don’t raise their variable mortgage rates beyond moves in the Reserve Bank cash rate.

This is far from guarantee with banks more than a decade ago blaming global funding costs for putting up their rates by a bigger margin.