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Highlights
- Speculations are rife that the Fed might adopt an aggressive rate hike policy soon.
- Central banks across the globe are now recognising the need for slower growth in the economy.
- To raise interest rates, the RBA holds a condition to bring inflation and wages growth within its target range.
After playing the guessing game for many months now, experts have finally revised their rate hike expectations to late 2022 for Australia. Much of this anticipation stems from speculations around the Fed embracing an aggressive rate hike policy soon.
Like Australia, the interest rates in the US were also reduced to the record-low level initially after the pandemic hit the world to boost the money supply. However, rising inflation and global events led many to believe that multiple interest rates hikes can be embraced by the Fed over the coming months.
Major big banks across the US expect as many as nine rate hikes by the central bank within this year itself. Speculations are rife that the Fed may take up a 25-basis point rate hike at each meeting in the coming months until early next year.
It seems clear that central banks across the globe are now recognising the need for slower growth in the economy, especially given the rapid rise of inflation. However, subjecting the economy to a series of interest rates hikes might be too much to take in one go.
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The need for rate hikes
Raising interest rates is a surefire way to reduce the existing money supply in the economy as it prompts lesser borrowings for spending. As demand soared across countries at unprecedented rates and supply-side issues led to shipment delays, limited supply of goods was met with rising prices.
These issues have further aggravated after an escalation of the Russia-Ukraine conflict. With commodity prices inching higher and fears of a further increase in oil and gas prices looming, experts are on the lookout for a quick way to control inflation domestically.
Consequently, many central banks have given hawkish signals based on the ongoing global developments. The goals of most central banks appear to bring back normal monetary policy settings into the economic ecosystem as soon as possible.
However, markets are now facing increased uncertainty partially because of the political tensions between Russia and Ukraine and partly due to the central banks’ reaction to these events.
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What about the RBA?
Australian markets are resonating with these global developments. Many Australian experts have flagged concerns about rapid rate hikes in the coming months. Speculations are rife that an interest rate hike could be seen by the third quarter of 2022. Market pundits suggest that rates might reach 0.5% by year-end.
To raise interest rates, the RBA holds a condition to bring inflation and wages growth within its target range, while achieving an unemployment rate lower than 4%. Currently, the unemployment rate stands at a 14-year low of 4.2%, close to the set target.
When Did Australia Last Increase Its Interest Rates?
When compared to its contemporaries, Australia stands out as the only country that has not embraced a rate hike in over a decade. Even as demand recovered in the economy, the Reserve Bank did not raise the cash rate. This was in stark contrast to Australian neighbour New Zealand, where the central bank (RBNZ) adopted multiple rate hikes in the past few months.
The RBA met for its monetary policy meeting on 1 March 2022 and announced no change to the cash rate. This came a month after the central bank ended its bond-buying program.
The current quarter is likely to be shaped by the effects of the ongoing global developments on the domestic economy. Soon, the central bank may give a clear idea of how it wants to approach an interest rate hike.
Bottom Line
Rate hikes talks have gained momentum across Europe, the US, Canada, and England. Central banks in certain regions have already lifted rates (Europe), with some expected to raise rates in the coming months (Canada and the US). Thus, the RBA might take cues from these central banks and finally bring forth a highly anticipated rate hike in the following months.
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