Another interest rate hike, but ‘sticky’ inflation likely to peak later this year

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Another interest rate hike, but ‘sticky’ inflation likely to peak later this year

For the third consecutive month, Australia’s central bank increased interest rates, indicating there will be more to come as it battles rising inflation even if doing so runs the risk of sparking an economic downturn.

The Reserve Bank of Australia increased its cash rate by 50 basis points to 1.35 per cent as it wrapped off its July policy meeting, totalling 125 basis points of increases since May and the quickest sequence of increases since 1994.

Block Earner CEO and co-founder Charlie Karaboga are still sceptical that the increase will make much of a difference. 

He says that despite the RBA hiking interest rates for three consecutive months, the 50 base point increase goes further to close the gap left by inflation, yet Aussies will still feel the pinch.

“With a spike in the cost of living largely being caused by factors outside of the country, such as the Ukraine war, a rise in interest rates is unlikely to bring inflation down for some time.

“In fact, although the RBA has moved to curb inflation by increasing borrowing rates and reducing demand for goods and services, the real cause is not entirely demand-driven. On the contrary, it’s due to supply-side shortages. This form of demand destruction is further pushing the economy towards a stagflationary environment – inflation will remain high, while we will experience economic stagnation.

“With the increased base point also mirrored in the official cash rate at 1.35, we can anticipate that asset prices will go through sharp correction and both savers and investors will experience the highest amount of wealth destruction in recent years.  

“To counter the impact of high inflation and asset volatility, Aussie savers and investors should be on the lookout for high-yielding alternatives to the big four, which will not only soften the blow to the cost of living but will also enable them to  save for major milestones like retirement or breaking into the housing market in an otherwise unstable economic climate.”

Inflation bites

According to RBA, inflation is expected to peak later this year and then fall back to the 2-3 per cent area next year.

“Inflation is likely to reduce as global supply-side concerns continue to improve and commodity prices stabilise, even if at a high level,” Philip Lowe, Governor said in the statement.

“Higher interest rates will also aid in the establishment of a more sustainable balance between the supply and demand for goods and services.

“Medium-term inflation expectations remain firmly anchored, and it is critical that they do so. Following the announcement of the June quarter CPI, a comprehensive set of updated estimates will be provided next month.”

More here.

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