What US rate hike means for Australia

America has pushed interest rates in the strongest rise in nearly three decades, raising concerns that Australia could follow suit.

Australians concerned about rising interest rates may have noticed some disturbing news from America this morning as the US Federal Reserve raised interest rates by 0.75 percent amid rising inflation.

The walk is the most aggressive rise the US has seen in nearly three decades. The last 75 basis point increase was in November 1994.

It’s a move that is likely to startle some homeowners in Australia, given how closely our economy follows what’s happening in the United States.

For example, if Wall Street is doing well, the Australian stock market tends to loosely follow the same trend.

Efforts by the Reserve Bank of Australia (RBA) to curb inflation already appear to be on a similar path to the US.

In its latest interest rate decision, the RBA raises official cash interest rate by 50 basis points – experts caught off guard by the magnitude of the increase.

That brought the official cash interest rate to 0.85 percent, returning it to its highest level since September 2019 and marking the first consecutive rate hikes in 12 years.

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The Federal Reserve’s overnight decision was even more aggressive, sparking concerns about what could be in store for Australian homeowners when the RBA meets next month.

But just because interest rates are rising in the United States doesn’t mean they will rise at the same pace in Australia, said Dr. Shane Oliver, chief of investment strategy and economics and chief economist at AMP.

He told news.com.au that there was “a risk” of a super-high rise like the one we’ve just seen in the US, but he doesn’t think it’s likely.

“Looks like we’re kind of on the run when it comes to rising interest rates and we’re seeing a lot of the same factors driving inflation here as we are in the United States,” he told news. com.au.

“However, the RBA does not automatically follow the Fed. It is doing what it thinks is best for Australia in terms of our domestic situation.”

It’s worth noting that inflation in the US is currently much worse than in Australia: 8.6 percent compared to 5.1 percent in Australia.

dr. Oliver said RBA Governor Philip Lowe surprised some economic experts this week when he appeared on ABC’s 7.30 to tell the nation we are likely to reach 7 percent inflation by the end of the year – and it needs to be brought under control.

“It was surprising, so there’s a risk that they’ll follow the US with a more aggressive rate hike next month, but that’s not what we’re predicting,” said Dr. Oliver.

He said the Fed’s decision did not change his forecast for a 0.5 percent rise in cash interest rates in July and a further 0.5 percent rise in August.

However, other economists believe the RBA wants to monitor moves overseas to avoid damaging the Australian dollar’s value against other major currencies.

Callam Pickering, APAC economist at Indeed, said that to address high inflation, which has largely been imported from abroad, the RBA needs tighter monetary policy to drive up the value of the Aussie dollar.

“A stronger Australian dollar is putting downward pressure on inflation,” he told news.com.au.

“Achieving that is more difficult when other central banks, such as the Federal Reserve, also act aggressively.

“Large moves abroad, therefore, may justify larger exchange rate changes by the RBA to avoid a damaging depreciation of the Australian dollar against our major trading partners.”

dr. However, Oliver believes that the Australian dollar matching other currencies is not the RBA’s primary concern, and is looking at the impact of its decisions on the Australian economy as a whole.

This morning there was also a jump for the Australian dollar, which rose more than 1 cent to a high of 70.24 cents – which, according to Dr. Oliver was a “pretty good value” anyway.

He said there are also several other factors that mean the RBA could go to the Fed differently.

A big one is that the Fed reacted Friday to a sharp rise in its latest inflation numbers, but when the RBA meets in July for its next rate decision, it won’t have any new local inflation data to support a larger-than-expected rally.

“The CPI won’t release this until the end of July, so we won’t get more inflation data until August,” said Dr. Oliver.

The US Federal Reserve only meets every six weeks, so now it doesn’t meet again until the end of July. This means it will be forced to make more aggressive hikes if it wants to tighten spending while the RBA meets every month, which Dr. Oliver enables more flexibility.

“The RBA said they would try to be flexible, which will help stabilize the economy,” he said. “Currently, the focus is all on inflation, not growth, but that could change after the August meeting and there could be a slowdown in rate hikes.”

US could see another big increase

The US Federal Reserve announced the rate hike on Wednesday (local time) – its most aggressive hike in nearly 30 years – and said it was ready to do it again next month in an all-out battle to stem soaring inflation.

The 75 basis point increase pushed interest rates to a range of 1.5-1.75 percent, up from zero at the start of the year.

The Fed is currently under intense pressure to curb rising gas and food prices, leaving millions of Americans struggling to make ends meet and US President Joe Biden’s approval ratings plummeting.

Fed Chair Jerome Powell said it is “essential” to lower inflation, and policymakers “have both the tools we need and the determination we need to restore price stability on behalf of American families.”

He stressed that the goal is to achieve that without derailing the US economy, but acknowledged that there is always a risk of going too far.

Mr Powell said the move was “an unusually large one”, but he does not expect such large increases “will be very common”.

But of Wednesday’s rate hike, he said: “It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit everyone.”

The president has endorsed the Fed’s efforts and hopes for success as his Democrats risk losing control of Congress in key midterm elections in November.

He has blamed opposition Republicans for blocking bills intended to cut costs and ease supply restrictions.

White House economic adviser Brian Deese told Fox News, “The most constructive steps Congress and the executive branch can take to help support what the Fed is trying to do is reduce the costs that directly affect families. facing and lowering the federal deficit.”

– with AFP

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