ABE Weekly – RBA flags two more interest rate rises

Australian Bond Exchange Weekly Newsletter

Friday 24 February 2023

ABE Weekly 24 February 23

Key Points

• RBA cash rate is 3.35 per cent (AUS)
• Inflation is 7.8 per cent (AUS)
• US Fed funds rate is 4.58 per cent (US)
• Inflation is 6.4 per cent (US)
• Inflation over 5 per cent (EU)
• ECB rate 3 per cent (EU)
• CPIH rose by 8.8 per cent in the 12 months to January 2023 (UK)
• Bank rate is 4 per cent (UK).

 

Australia

The RBA’s cash rate is 3.35 per cent as of 7 February 2023, the next official cash rate announcement will be on 7 March 2023. The board expressed concern over high inflation and the possibility of it becoming entrenched; it flagged two more interest rises at its February meeting.  

Rising interest rates are having different impacts on various sectors of the economy; while some property investors are benefiting from the situation, others are struggling to make ends meet.  

Therefore, it could be more difficult for first-home buyers to enter the property market, leading to higher inequality in Australia.  

In terms of inflation, let’s revisit the concept. Inflation happens when demand for goods and services exceeds supply, leading businesses to increase prices without losing customers. In Australia, inflation has increased due to the lingering effects of pandemic stimulus measures, accumulation of household savings, the Russia-Ukraine conflict, and supply chain issues caused by lockdowns in China. The RBA is trying to decrease inflation by raising interest rates, so people spend less. 

Inflation reached 7.8% in the December quarter, the highest since 1990. According to data from the Australian Bureau of Statistics (ABS), the most significant drivers of the increase in the “Consumer Price Index” (CPI) were Domestic holiday travel and accommodation (+13.3%), Electricity (+8.6%), International holiday travel and accommodation (+7.6%) and new dwelling purchase by owner-occupiers (+1.7%). 

In his opening statement to the House of Representatives Standing Committee on Economics, Philip Lowe, Governor of the Reserve Bank of Australia, Lowe acknowledged that the impact of the interest rate increase is being felt unevenly across the community but emphasized the importance of the RBA’s mandate to preserve medium-term price stability.  

Indeed, there are concerns that low-income households bear the burden of the rising cost of living; the policy is perceived as blunt and slow to work.  

United States (US)

The more the US Federal Reserve raises the interest rate, the more pressure is on the Reserve Bank to follow, regardless of inflation pressures in Australia. Currently, the Federal Funds rate stands at 4.58 per cent as of 20 February 2023. 

Meanwhile, the CPI increased 6.4 per cent over the last 12 months. 

Inflation in the US can affect Australia in several ways, including trade and investment. Suppose the Fed raises interest rates to control inflation, this could potentially lead to people moving their money away from Australia and into the US. 

European Union

Inflation in the European Union can affect Australia mainly through trade. If inflation in Europe rises, consumers may cut back and spend less on Australian goods and services. Additionally, suppose there is a rise in the prices of commodities.  It could increase the costs of Australian exports like coal and liquefied natural gas. The persistent rise in inflation in Europe in 2021-22 was a significant challenge for central banks, with inflation exceeding 5 per cent in almost all European economies by late summer 2022.  

Meanwhile, changes in interest rates can affect Australia through exchange rates, trade, investment, and economic growth. The European Central Bank’s (ECB) main refinancing operations rate is 3 per cent as of 8 February 2023. 

United Kingdom (UK) 

According to the BBC, Inflation in the UK is rising due to the high energy costs; oil and gas have had more demand after covid, and the conflict in Ukraine has reduced the quantity available. The conflict in Ukraine has also reduced the amount of grain available, increasing food prices.  

The Consumer Prices Index, including owner occupiers’ housing costs (CPIH), rose by 8.8% in the 12 months to January 2023, down from 9.2% in December 2022. 

Interest rates in the UK impact Australia through capital flows and investment decisions. For example, suppose the interest rate is higher in the UK. In that case, investors may decide to divest from Australia and take their money to the UK.  

The current bank rate is 4 per cent, the next update will be given on 23 March 2023.  

According to the Department of Foreign Affairs and Trade (DFAT), Australia and the UK have a significant and comprehensive relationship underpinned by our shared heritage, common values, and substantial trade and investment links. We are like‑minded on global issues such as international security, multilateral cooperation, and economic issues on the G20 agenda. Brexit has given Australia a unique opportunity to strengthen its relationship with the UK.

 

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.  

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