ABE Weekly 13/01/2023 - Australian Bond Exchange

Australian Bond Exchange Weekly Newsletter

Friday 13 January 2023

Picture by Pexels- RODNAE Productions

Key Points

Cash rate stands at 3.10% (Aus)
Inflation increased 7.3% in the twelve months to November (Aus)
World Bank cut its global economic forecast to 1.7% this year (Global)
The Federal Funds rate stands at 4.33% (US)
The annual inflation stands at 7.1% for the 12 months to November 2023 (US).

Australia

On December 6th, 2022, the “Reserve Bank of Australia” (RBA) increased the official cash rate by 0.25% to 3.10%. The next RBA Board meeting and Official Cash Rate announcement will be in about a month, on February 7th, 2023.

The inflation rate is the main factor the RBA considers when raising interest rates. If inflation increases, interest rates go up to slow down the economy. According to the “Australian Bureau of Statistics” (ABS), the monthly “Consumer Price Index” (CPI) rose 7.3% in the twelve months to November. Why? Mainly because of increases in the prices of housing (9.6%), Food (9.4%), transport (9%) and furniture (8.4%). We expect the RBA to announce further interest rate increases based on these figures.

Global Markets

It is not looking good. The World Bank has cut its global economic forecast from 3% predicted in June to 1.7% for this year. Furthermore, it signals a recession ahead caused by higher inflation due to COVID-19 effects and the Russia-Ukraine conflict. To get an idea of where we are, let us compare that to historical figures; 1.7% growth would be the lowest figure since 1991, except for the recessions of 2009 and 2020, due to the GFC and COVID-19, respectively.

US Markets

As of January 9th, 2023, the Federal Funds rate stands at 4.33% after an increase of 50 bps, making it more challenging to borrow money. In addition, the Fed expects to increase the interest rate to 5% in 2023 which should help slow the economy’s pace.

The annual inflation rate for the US stands now at 7.1% for the 12 months to November 2022. Let us recap how we got here. COVID-19 started a new period of inflation in the US. Millions of Americans were at home and saved more as they were not going out and received Government support. Although they could not go out, they shopped online, resulting in a huge demand increase and creating bottlenecks in supply chains. Hence, fewer products were available to sell. The demand was much greater than the supply, which resulted in higher inflation. The higher interest rate hikes of the Fed have been slowing down inflation. However, we need to be ready for a recession in the US. “Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.” Jerome Powell.

EU/ BOE

The European Central Bank (ECB) increases the primary refinancing operations rate to 2.50%. (EU)
The Bank of England (BOE), Monetary Policy Committee, voted on December 15th, 2022, to increase the BOE base rate to 3.5% (UK).

In Europe, the main task of the ECB is to maintain price stability, and it aims to keep inflation at 2% over the medium term. In the Euro area, the Harmonised Index of Consumer Prices (HICP) is used to measure consumer price inflation or the change over time in the prices of consumer goods and services purchased by euro-area households10.

HICP in the euro area decreased to 10.1% in November 2022 compared to 10.6% in October 2022. (EU)
In the UK, the Consumer Prices Index, including owner occupiers’ housing costs (CPIH), rose by 9.3% in the 12 months to November 2022, down from 9.6% in October. CPIH (monthly) increased by 0.4% in November 2022, compared with a rise of 0.6% in November 2021.

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.

Bibliography

ASX. (2023, January 11). RBA Rate Tracker. Retrieved from ASX: https://www2.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker#:~:text=The%20current%20official%20cash%20rate,on%20the%207th%20February%202023.

Australian Bureau of Statistics. (2023, January 11). Monthly Consumer Price Index Indicator. Retrieved from Australian Bureau of Statistics: https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release

European Central Bank. (2022, December 21). European Central Bank. Retrieved from Key ECB interest rates: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html

European Central Bank. (2023, January 11). Measuring inflation – the Harmonised Index of Consumer Prices (HICP). Retrieved from European Central Bank : https://www.ecb.europa.eu/stats/macroeconomic_and_sectoral/hicp/html/index.en.html

Josephs, J. (2023, January 11). Global recession warning as World Bank cuts economic forecast. Retrieved from BBC News: https://www.bbc.com/news/business-64213830

Office for National Statistics. (2022, December 14). Consumer price inflation, UK: November 2022. Retrieved from Office for National Statistics: https://www.ons.gov.uk/economy/inflationandpriceindices#:~:text=Consumer%20price%20inflation%2C%20UK%3A%20November%202022&text=On%20a%20monthly%20basis%2C%20CPIH,of%200.6%25%20in%20November%202021.

Schneider, L. D. (2023, January 11). Powell: Fed needs independence to fight inflation, should avoid social policy. Retrieved from Reuters: https://www.reuters.com/markets/us/powell-fed-needs-independence-fight-inflation-should-avoid-climate-policy-2023-01-10/

Steinberger, M. (2023, January 10). The Fed May Finally Be Winning the War on Inflation. But at What Cost? Retrieved from https://www.nytimes.com/2023/01/10/magazine/inflation-federal-reserve.html

UK Government. (2022, December 15). HMRC late payment interest rates to be revised after Bank of England increases base rate. . Retrieved from GOV.UK: https://www.gov.uk/government/news/hmrc-late-payment-interest-rates-to-be-revised-after-bank-of-england-increases-base-rate–9

United States Fed Funds Rate. (n.d.). Retrieved from Trading Economics: https://tradingeconomics.com/united-states/interest-rate#:~:text=interest%2Drate%20decisions.-,The%20Federal%20Reserve%20raised%20the%20fed%20funds%20rate%20by%2050bps,in%20line%20with%20market%20expectations.

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