This matters because it will impact your mortgage interest rate.
What will happen to my mortgage interest rate?
Think back to September last year.
Inflation came out at 7.2%. This was down from the previous quarter. But it was above the Reserve Bank’s expectations. That was the problem.
What happened? Interest rates jumped immediately.
The banks and the financial markets knew what was coming. The Reserve Bank would have to take interest rates even higher.
At the next monetary policy statement, Adrian Orr came out swinging. The Reserve Bank ramped up the OCR, and within 3 months, the 1-year mortgage interest rate jumped by about 1%.
This was all because inflation came in higher than expected.
Today, it’s the other way around. Inflation came in under expectations.
What do you think is going to happen?
Don’t get too excited. Interest rates won’t fall by 1% over the next 3 months.
But this is a positive sign that inflation is on its way down – which gives us more confidence that interest rates will start to head down over the next few years.
The Reserve Bank will now think, “our interest rate rises are working. Maybe we don’t need to raise the OCR much more … maybe we can leave it where it is.”
That ‘change of tune’ will encourage banks and financial markets to soften interest rates, which will help property investors and homeowners.
Where will inflation go next?
While banks and economists got today’s inflation number wrong – they may have correctly picked the trend.
The following graph shows what most of the banks think will happen.
Most are picking that inflation will fall quickly by the end of the year and that we’ll be back within the Reserve Bank’s 1-3% target range by next year.