What the US rate hike means for Australia

America has pushed interest rates up in the biggest hike in nearly three decades, raising fears that Australia could follow suit.

Australians worried about rising interest rates may have noticed some worrying news out of America this morning as the US Federal Reserve hiked rates by 0.75% amid soaring inflation .

Hiking is the most aggressive rise that the United States has experienced in nearly three decades. The last increase of 75 basis points dates back to November 1994.

It’s a decision that may come as a surprise to some owners in Australia given how closely our economy tracks what’s happening in the United States.

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

Attempts by the Reserve Bank of Australia (RBA) to bring inflation down already appear to be taking a similar route to that of the United States.

In its latest interest rate decision, the The RBA has raised the official exchange rate by 50 basis points – take the experts by surprise in the face of the magnitude of the increase.

This took the official exchange rate to 0.85%, bringing it to its highest level since September 2019 and marking the first consecutive rate hike in 12 years.

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The Federal Reserve’s move overnight was even more aggressive, raising concerns about what awaits Australian homeowners when the RBA meets next month.

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

He told news.com.au that there “is a risk” of a large upside like the one we just saw in the US, but he doesn’t think it’s likely.

“We seem to be a bit on the run when it comes to rising interest rates and we’re seeing a lot of the same factors pushing up inflation here that they’re also seeing in the United States,” he said. he told the news. com.au.

“However, the RBA does not automatically follow the Fed. He is doing what he thinks is best for Australia in terms of the domestic situation.

It should be noted that inflation in the United States is currently much worse than in Australia – 8.6% compared to 5.1% in Australia.

Dr Oliver said RBA Governor Philip Lowe surprised some economic pundits this week when he appeared on ABC. 7:30 a.m. to tell the nation that we are should reach 7% inflation by the end of the year – and it must be mastered.

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

He said the Fed’s decision did not change his forecast of a 0.5% cash rate hike in July and another 0.5% hike in August.

However, other economists believe the RBA may want to track overseas moves to avoid damaging the value of the Australian dollar against other major currencies.

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

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

“It’s harder to get there when other central banks, such as the Federal Reserve, are also increasing aggressively.

“Big moves overseas could therefore warrant larger rate moves by the RBA to avoid a damaging depreciation of the Australian dollar against our major trading partners.”

Dr Oliver, however, believes that pairing the Australian dollar with other currencies is not the RBA’s main concern, and he is looking at the impact of its decisions on the Australian economy as a whole.

This morning there was also a jump in the Australian dollar which jumped more than 1 cent, to a high of 70.24 US cents – which Dr Oliver said was “pretty good value anyway. “.

He added that there are also several other factors that mean the RBA could perform differently from the Fed.

One of the most important is that the Fed was reacting to a sharp rise in its latest inflation figures on Friday, but when the RBA meets in July for the next rate decision, it will not have new local data on inflation to justify a bigger increase than expected. ascend.

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

The US Federal Reserve only meets every six weeks, so it doesn’t meet again until the end of July. That means he’s forced to make more aggressive increases if he wants to tighten spending, as the RBA meets monthly, which Dr Oliver says allows him more flexibility.

“The RBA has said it will try to be flexible, which helps stabilize the economy,” he said. “At the moment the focus is on inflation and not growth, but that could change after the August meeting and there could be a slowdown in rate hikes.”

US could see another big uptick

The US Federal Reserve announced the interest rate hike on Wednesday (local time) – the most aggressive hike in nearly 30 years – and said it was ready to do so again next month in a battle without thanks for bringing down runaway inflation.

The 75 basis point rise saw rates rise to a range of 1.5-1.75% from zero at the start of the year.

The Fed is currently under intense pressure to rein in the spike in gasoline and food prices that has left millions of Americans struggling to make ends meet and is sending US President Joe Biden’s approval ratings plummeting. .

Fed Chairman Jerome Powell said lowering inflation was ‘essential’, and policymakers ‘have both the tools we need and the determination it will take to restore stability awards on behalf of American families”.

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

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

However, on Wednesday’s rate hike, he said: ‘It is essential that we bring inflation down if we are to have an extended period of strong labor market conditions that benefit everyone.’

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

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

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 to reduce the cost at which families face directly and reduce the federal deficit.

– with AFP

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