The big four banks wasted no time in lifting their rates in line with the RBA’s rate announcement yesterday, which represented the biggest one-month increase in 22 years. Indeed, Westpac has already hiked its variable rate by the full 50 basis points.
And more pain is on the way, with warnings that we’ll get the same again next month from the central bank.
Most economists didn’t see the big hike coming, but it’ll be no surprise if the July rate rise is in the same order of magnitude, given the bank’s comments that inflation will now outstrip the 6% predicted in May.
Where to next for inflation?
Professor of Economics John Quiggin told the ABC this morning that the RBA should be targeting around 4% inflation rather than the standard 2-3%.
“We shouldn’t be rushing to squeeze this inflation out, and then we should be returning to a rate much more like 4% than 2-3%,” he said.
“It would be a big change for the policies we’ve had for the last 30 years, but those policies haven’t worked very well.
“They were useful in breaking the inflationary cycle of the 70s and 80s but globally they gave us the global financial crisis in important respects, and in most countries in the world interest rates have fallen to zero well before the pandemic and have stayed there.”
Caution on rates, counsels academic
“Australia has a history of aggressive interest rate hikes to tame inflation,” wrote Business and Economy editor Peter Martin in The Conversation.
“In 1994, Reserve Bank Governor Bernie Fraser rammed up the cash rate from 4.75% to 7.5% in a matter of months. But that was when wage growth was well above inflation and the bank was trying to dampen ‘demands for wage increases’ to prevent a wage-price spiral.
“We don't even have the beginnings of that yet. Unless the bank wants to needlessly impoverish Australians, and keep going until it pushes them out of work, it will increase rates cautiously from here on.”
What the markets say
The ASX is poised to rise today, following busy trade on Wall Street. Local markets appear to have adjusted themselves quickly and are pricing in the predicted aggressive rate rises for at least the next two months.
ASX futures were up 54 points or 0.8% to 7,155 early this morning, while the local currency was 0.6% higher, looking towards US72.50¢; the Bloomberg dollar spot index edged lower.
On bitstamp.net, bitcoin was up 0.5% to $US31,536.11 this morning, recovering from earlier losses.
On Wall Street, all three big indices finished slightly up as investors became accustomed to grappling with the same issues. The Dow Jones index closed up by 264 points or 0.8%. And the S&P 500 index rose by 1.0% with the Nasdaq index adding 114 points or 0.9%.
Winners in New York trading included BHP, which gained 3.6% and Atlassian (NASDAQ:TEAM), which moved 5.6%.
Tesla (0.3%) and Apple (1.8%) made up some ground, while Amazon slid 1.4%.
In Europe, the sentiment was shakier, with fears that interest rate rises could flatten major economies. German industrial orders fell for the third time in April, while the technology sector was down 1.1%, and three indices – the Dax, the FTSE and the pan-European STOXX 600 – all trended downwards.
Watch fuel, says Goldman Sachs (NYSE:GS)
Goldman Sachs predicts that oil and gas prices will rise even higher over the next quarter. The bank forecasts that Brent Crude Oil prices will average $140 a barrel between July and September, up from its previous prediction of $125 a barrel. Brent is currently trading at about $120 a barrel.
The bank says that retail gas prices over the US summer will need to spike to around $160 a barrel to curb demand.
Back home, Energy Minister Chris Bowen has summoned state ministers for a crisis meeting on the local power woes, as gas and fuel prices look set to blow out just as winter bites.