With the economy slowing, inflation pressures easing and household expenditure diving, starting the new financial year with hike number 13 could well prove to be an ominous sign, writes Ian Verrender.
Here are a few reasons why rates could still go up a few more times:
Inflation is not decreasing fast enough.
If you take fuel costs out of the latest monthly inflation data, the inflation rate would be the same as it was 2 months ago. We are also two months away from seeing the impact of energy prices cause an inflation increase and for the year-on-year measurement against fuel prices to be flat.
If our interest rate is below that of the US, our currency exchange rate suffers.
The US is currently at 5.25% with inflation at 4.00% and two more rate increases are expected by the end of the year. Australia is at 4.10% with inflation at 5.60%. In the past, we have either increased rates to match the US, or decreased them slower than the US to improve our exchange rate.
Throughout the 90s and 2000s, interest rates stayed around the 5.00% mark while inflation remained in the 2-4% range.
The current rates could be status quo for the next decade or two.
The unemployment rate is at record lows.
Monetary policy expects that one of the metrics that shows the economy returning to normal levels is an increase in unemployment. More employment = less spending = prices drop due to lack of demand = inflation drops.
Companies are still comfortable with the demand for their products and services at current price levels.
Many companies are still increasing prices and have not reached the point where consumers have stopped buying. We either to reach the point where prices are unacceptable for consumers, industry competition lowers prices, or some kind of product / innovation kills the demand.
Here are a few reasons why rates could still go up a few more times:
Inflation is not decreasing fast enough.
If you take fuel costs out of the latest monthly inflation data, the inflation rate would be the same as it was 2 months ago. We are also two months away from seeing the impact of energy prices cause an inflation increase and for the year-on-year measurement against fuel prices to be flat.
If our interest rate is below that of the US, our currency exchange rate suffers.
The US is currently at 5.25% with inflation at 4.00% and two more rate increases are expected by the end of the year. Australia is at 4.10% with inflation at 5.60%. In the past, we have either increased rates to match the US, or decreased them slower than the US to improve our exchange rate.
Throughout the 90s and 2000s, interest rates stayed around the 5.00% mark while inflation remained in the 2-4% range.
The current rates could be status quo for the next decade or two.
The unemployment rate is at record lows.
Monetary policy expects that one of the metrics that shows the economy returning to normal levels is an increase in unemployment. More employment = less spending = prices drop due to lack of demand = inflation drops.
Companies are still comfortable with the demand for their products and services at current price levels.
Many companies are still increasing prices and have not reached the point where consumers have stopped buying. We either to reach the point where prices are unacceptable for consumers, industry competition lowers prices, or some kind of product / innovation kills the demand.