Can Mortgage Rates Fall Even Further Due to the Low Inflation?

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The mortgage rate increase predicted for spring 2014 did not occur. Quite the opposite, the average rate experienced a drop and is now around 4.375%. There are predictions that it will remain at its low level and that it may go further down. One of the underlying factors for this is the low inflation.

In March 2014, the inflation rate rose to 1.5% on an annual basis. This was slightly above the prediction of 1.4% and way below the set target of the Federal Reserve which was 2%. On a monthly basis, the consumer price index increased by 0.2% from February to March while the projected increase was 0.1%. Since inflation did not rise as expected by the Fed, this naturally led to curb in the predictions for increasing mortgage rates.

There is an indirect link between the interest rates on mortgage loans and the inflation rate. The inflation rate affects directly the value of the dollar. The lower it is the more valuable the dollar is. At the same time, the mortgage bonds are in US dollars. This means that when the inflation rate is low, these bonds are more valuable to investors. In this case, they will keep the bonds instead of selling them in the market. This leads to an increase in bond prices and to lower mortgage rates.

The relationship between home loan rates and inflation may seem complex, but it favors home buyers currently. The inflation is projected to remain low in the coming months despite the fact that the Federal Reserve is setting higher targets. This is because the US economy is recovering at a slower pace than expected.

In this situation, mortgage rates may drop further down. Still, the decrease is not going to be significant. They will most likely remain close to their current level. If the inflation rate starts increasing at a faster pace, this will be a signal that interest rates on home loans will go up.

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