The recent rise in the inflation rate is causing considerable movement across financial markets. After the consumer price index climbed from 3.1 per cent to 3.5 per cent between August and September, pressure on monetary policy is mounting noticeably. Markets now firmly anticipate that two key interest rate rises will be decided before the end of the current year.
Fuel prices drive consumer price index
Rising petrol prices are considered the primary driver of this wave of inflation. This price surge fed directly through into the overall consumer price index, significantly accelerating inflationary momentum. The increase of 0.4 percentage points within just one month restricts the scope for monetary policy manoeuvre and compels central banks to take swifter countermeasures.
Consequently, market participants have swiftly revised their interest rate expectations upwards. While a more moderate monetary policy stance was previously considered conceivable, market actors are now pricing in two consecutive rate steps before the turn of the year. The primary objective of these measures is to curb persistent consumer price pressure.
Impact on mortgages and property affordability
The looming rate hikes are likely to have direct consequences for the property sector. Rising base rates generally increase refinancing costs for credit institutions, which translates into higher mortgage rates in the short term. For borrowers, this noticeably increases monthly financing costs for home ownership.
- —Rise in the inflation rate from 3.1 per cent in August to 3.5 per cent in September
- —Petrol prices as the main cause of the sharp increase in consumer prices
- —Expectation of two base rate hikes before the end of the current year
- —Mounting upward pressure on mortgage rates and declining affordability in the property market
As a consequence, property affordability is coming under pressure. Higher interest burdens reduce the financial leeway of prospective buyers and could dampen demand in the property market. Market observers are preparing for the altered financing conditions to leave a noticeable mark on transaction activity in the coming months.
