Electric Shock That Could Raise Rates

There are signs that the RBA could soon pull back on the reins of rising interest rates, but one bad move could turn things out of control.

The falling standard of living that has befallen Australian households in 2022 is finally showing some prospect of easing.

Inflation is still on edge, thanks in large part to prices beyond the nation’s control, and wages are still very lagging, meaning discretionary purchasing power is declining.

Until now, this economic misery has been exacerbated by financial markets obsessed with the idea that Australian inflation will be higher and more entrenched than in other countries. That’s why they pushed the Reserve Bank to reprice interest rates as well.

After initially vowing it would ignore the markets until 2024, the RBA folded like a cheap suit earlier this year and started adding mortgage pain for the misery of the household.

Needless to say, this has led to a disastrous crash in consumer confidence, which is the best leading indicator of what’s to come in falling spending and stalling economic activity:

So, what’s the good news?

In fact, due to the mishandling of the Covid vaccine and the rollout of rat testing, Australia is lagging behind the global cycle of tightening inflation rates. As such we have only seen a few walks in a few months.

In the US, however, the markets control mortgage rates as much as the Federal Reserve does† Most US mortgages have a fixed interest rate and are benchmarked against the 30-year bond yield.

These interest rates have been rising for nearly a year and are weighing on economic activity in the US more clearly as housing markets slow, stock prices plummet and consumers shrink.

This resulted in the largest drop in forecasted final interest rates (the rate at which the Fed stops walking) in this cycle last week.

Indeed, interest rate futures markets have begun pricing in rate cuts of two to three in 2023 as the prospect of a Fed-induced recession mounts.

Australia may be a geographic island, but it’s no big deal when it comes to financial markets. So the repricing of final interest rates in the US also reminded markets: Australian households are heavily indebted and our own expected final interest rate also fell.

The entire local interest rate price cap (or curve as the acorns call it) slipped from a closing cash rate of about 4.2 percent to 3.9 percent. In addition, the markets are now also forecasting small rate cuts for Australia in October 2023:

The Electric Shock That Could Kill Everything

The end of the RBA’s rate-cutting cycle is now in sight, markets said. Plus, they have a history of overruns both on the upside and downside, so it’s likely to come much sooner given how badly the Australian consumer is about to be hit.

Unless the Albanian government does one thing wrong.

Aussie inflation is largely a story of prices coming from offshore. Oil is especially to blame. There is little we can do about that, but luckily it is also starting to crumble due to the possible recession in the US.

The problem is that the Ukrainian conflict that drove oil insane also put a rocket under global coal and gas prices and they won’t fall, and probably won’t fall, because Russia is attacking them with austerity as an act of war.

This should be good for Australia and it is if you live in WA which reserves cheap locally produced fuels for themselves. But if you live anywhere east of that border, you are subject to the disastrous regime of non-regulation of goods that has broken the gas and electricity markets and put 100 percent energy bill on the train

If not resolved, it will add 3 percent to the CPI in the coming year and more on its own. Plus anything else every company adds to try to recoup the cost.

In that case, Australia could face a very troubling inflation problem even if prices fall globally.

As long as the Albanian government follows WA’s lead and introduces either domestic reservations, export duties or super profit taxes on our coal and gas export cartels, we can be pretty sure the RBA will stop soon.

If not, the sky is the limit on interest rates as a vain RBA is forced to try and drive down global energy prices by wiping out the local economy.

David Llewellyn-Smith is chief strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding editor and editor of The Global Economy of The Diplomat, the leading portal to geopolitics and economics in Asia. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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