Tomorrow’s meeting of the Reserve Bank of Australia is not about whether interest rates will rise but by how much, with ferocious discussion among analysts and economists about the level of future interest rates. Like the Bank of England, the Reserve Bank of Australia is still playing catch-up, having taken far too long to recognise the threat of inflation.
Markets sent tumbling on reassessment
Whether governments worldwide publicly recognise it or not, the US Federal Reserve continues to dictate monetary policy. Having recently reiterated an aggressive stance on interest rates as the world continues to fight inflation, the Australian economy has many challenges ahead. The Australian property market is also under massive pressure in what is quickly becoming a nightmare scenario. Last month saw prices drop at the quickest pace for 39 years!
Is inflation really that important?
Many people predict a double interest rate rise in what is fast becoming a no pain, no gain scenario. Only a couple of weeks ago, the Australian stock market was factoring in a short-term peak in interest rates, but things have changed dramatically. Effectively led by the US Federal Reserve, central banks worldwide are focusing on inflation first and leaving thoughts of a recession until tomorrow. Is this a dangerous strategy?
What next for Australian interest rates?
While the Bank of England has taken an aggressive approach to interest rates in the short to medium term, this is nothing compared to Australia. As recently as May, the Australian official cash rate was just above 0% and is expected to rise to around 2.35% after tomorrow’s meeting. This has been a short sharp shock for the Australian economy, the property market, consumers and stock markets. Even though many believed the worst was over, further interest-rate hikes are expected in the short to medium term. But might the pace of increase start to fall?
Australian housing market and the ticking time bomb
Even though the Australian property market has recently turned downwards, many believe the reaction in the short-term supports a degree of optimism as we advance. However, interest rate rises in the mortgage market can take some time to filter through, as can the forthcoming impact of refinancing fixed-rate mortgage terms coming to an end. Consequently, you could argue that the effects of rising interest rates on the Australian property market have not even started yet.
Is Australia poised for a recession?
Considering Australia was one of the few countries to avoid recession in light of the 2007/8 US mortgage crisis, can the country avoid another worldwide economic decline? Opinion is certainly divided about the Australian economy, with unemployment still relatively low, but the full impact of interest rate rises is yet to be felt. There is also the problem of restarting the Australian economy, with interest rate increases set to bring economic activity to a screeching halt.
Akin to firing up a stalled juggernaut, it will take some time to restart the economy and get back up to full speed. While some optimists suggest the inflationary battle is just a short-term blip, many are sceptical. Central banks worldwide have flip-flopped, effectively ignoring inflation last year to a full-blown obsession this year. Will Australian businesses and consumers pay the price for the relatively slow reaction from the Reserve Bank of Australia to out-of-control inflation? At the moment, the signs are not encouraging.