ABE Weekly - RBA continues to hike the cash rate

Australian Bond Exchange Weekly Newsletter

Friday 10 March 2023

ABE Weekly 10 March 2023 PDF Version

Key points:

The Reserve Bank of Australia (RBA) cash rate is 3.6 per cent (Aus)
The “Consumer Price Index” (CPI) increased 7.8 per cent over the twelve months to the December 2022 quarter (Aus)
The Fed funds rate is 4.57 per cent (US)
EU had a Harmonised Index of Consumer Prices (HICP) of 8.6 per cent in January 2023 compared to 9.2 per cent in December 2022 (EU)
The “Consumer Prices Index including Owner Occupiers’ Housing Costs” (CPIH) increased 8.81 percent in the 12 months to January 2023, down from 9.2 per cent in December 2022. (UK)
The current bank rate is 4 per cent with the next update to be on 23 March 2023 (UK).

Australia

Interest rates were raised by the Reserve Bank of Australia (RBA) to 3.62 per cent for 10th month in a row. According to ABC News, Federal Government has acknowledged there has been an increase in calls of distress to crisis support hotlines over the cost of living. Lifeline revealed there has been a 49 per cent increase in referral searches by Lifeline counsellors related to financial distress and homelessness.

The “Consumer Price Index” (CPI) increased 7.8 per cent over the twelve months to the December 2022 quarter. If inflation stays high, it will lead to higher interest rates, people losing jobs and more pain, according to the ABC News.

United States (US)

Jerome Powell, the Federal Reserve (Fed) chair, stated that the Fed has considered raising interests more if it is necessary, depending on incoming economic data. One of the indexes that the Fed reviews to make rate decisions is the “Personal Consumption Expenditures Price Index” (PCE Price Index) which captures inflation or deflation data across a wide range of consumer expenses and reflects changes in consumer behaviour. Well, after six months of data showing the US economy was cooling down, there was a sudden re-acceleration in the PCE Price Index from 5.3 per cent (from a year earlier) in December to 5.4 per cent in January (from a year earlier). In real-life terms, the US Economy added half a million jobs in January, wages keep rising and Americans are spending freely on goods, and services like vacation travel and restaurant eating. Now, the Fed funds rate is 4.57 per cent.

European Union (EU)

The latest data from the European Central Bank (ECB) on inflation shows that the EU had a Harmonised Index of Consumer Prices (HICP) of 8.6 per cent in January 2023 compared to 9.2 per cent in December 2022. The main refinancing operations rate of the ECB is 3 per cent as of 8 February 2023. In terms of interest rates changes, the ECB is clear on its intention to return inflation to its 2 per cent medium term target and that may require further increases. Higher rates would mean tighter budgets for European businesses and consumers. The EU is important to Australia because, according to the Department of Foreign Affairs and Trade (DFAT), the EU is a market for Australian goods and services of almost 450 million people and a GDP of around 23 trillion. We want the EU to have enough disposable income to buy Australian produce. However, more important is the need for the Ukraine-Russia conflict to end.

United Kingdom (UK)

The “Consumer Prices Index including Owner Occupiers’ Housing Costs“ (CPIH) increased 8.89 percent in the 12 months to January 2023, down from 9.2 per cent in December 2022. The current bank rate is 4 per cent with the next update to be on 23 March 2023. If foreign cash interest rates are higher than the one in Australia, then investing in those assets is more attractive than investing in Australia. The advantage that Australia then has now is a lower exchange rate compared to the Sterling Pound that makes our products cheaper to the UK market. Australia’s exchange rate and the UK’s new position looking for new markets outside of the EU might be a good opportunity for Australia’s exports.

Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. You should obtain the relevant appropriate document for any product mentioned and consider its contents before making any decision. 

References

ABC News. (2023, 03 08). As crisis calls over financial distress climb, treasurer and finance minister say they know rate rises are hurting. Australia. Retrieved 03 08, 2023, from https://www.abc.net.au/news/2023-03-08/government-notes-distress-calls-over-inflation-rate-rises/102066882?utm_campaign=abc_news_web&utm_content=link&utm_medium=content_shared&utm_source=abc_news_web

Board of Governors of the Federal Reserve System. (2023, March 07). Selected Interest Rates. Retrieved 03 08, 2023, from https://www.federalreserve.gov/releases/h15/

Department of Foreign Affairs and Trade (DFAT). (n.d.). Australia-European Union Free Trade Agreement fact sheet. Australia. Retrieved March 08, 2023, from https://www.dfat.gov.au/trade/agreements/negotiations/aeufta/australia-european-union-fta-fact-sheet#:~:text=1%20Australian%20goods%20exports%20of%20%2414.4%20billion%2C%20and,largest%20source%20of%20FDI%20%28%24121%20billion%29.%20More%20items

New York Times. (2023, March 07). Fed Chair Opens Door to Faster Rate Moves and a Higher Peak. United States. Retrieved 03 08, 2023, from https://www.nytimes.com/2023/03/07/business/economy/fed-powell-interest-rates.html

New York Times. (2023, February 24). The Fed’s Preferred Inflation Gauge Sped Back Up. Retrieved 03 08, 2023, from https://www.nytimes.com/2023/02/24/business/economy/inflation-spending-fed.html

Office for National Statistics. (2023, February 15). Inflation and Price Indices. UK. Retrieved March 09, 2023, from https://www.ons.gov.uk/economy/inflationandpriceindices#:~:text=Consumer%20price%20inflation%2C%20UK%3A%20January%202023&text=The%20Consumer%20Prices%20Index%20including,from%209.2%25%20in%20December%202022.

Reserve Bank of Australia. (2023, March 08). Cash Rate Target. Australia. Retrieved from https://www.rba.gov.au/statistics/cash-rate/

ABE Weekly – RBA continues to hike the cash rate

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