Over the past two days, there has been bad news for the economy and those concerned about the Reserve Bank’s actions. The important economic data regarding wage rises and unemployment did not meet expectations, indicating that the Reserve Bank may increase interest rates in June or August. It was hoped that there would be smaller wage rises and a larger increase in unemployment, but this did not occur. However, the slight rise in unemployment from 3.5% to 3.7% may result in a pause from the Reserve Bank next month. The CBA’s economic team predicted that the cash rate would reach 3.85% in this interest rate cycle, using the term “terminal.” It is unclear whether this means it will be the last rate rise or if it will have a negative impact on the economy. Economists working for banks tend to be more polite than commentators, but there may be some cheekiness in their choice of words. Economists are aware that the Reserve Bank’s board has no reliable script for raising interest rates to combat inflation.
The current inflation is a result of various factors such as cost surges due to pandemic lockdowns, government overspending, low interest rates by central banks, foreign workers leaving, businesses overcharging, Putin’s war increasing oil prices, OPEC+ keeping energy prices high, and the world’s shift towards greener sources of power which are more expensive. Central banks are using old rule books to combat inflation, but this time it’s different as they’ve never started with a cash rate of 0.1% and have never raised interest rates so quickly and aggressively over a short period of time. This is evident from the red line in the chart provided.
Over the past two days, the release of important local economic data on wage rises and unemployment has not been as bad as expected, which could lead to the Reserve Bank of Australia (RBA) implementing another interest rate rise in June or August. However, the rise in unemployment from 3.5% to 3.7% may provide a temporary pause from the RBA next month. The CBA’s economic team predicted that the cash rate would reach 3.85% in this interest rate cycle, using the word “terminal” to suggest it could be the last rate rise or one that could have negative consequences for the economy. Economists believe that the RBA has no reliable script for raising interest rates to combat inflation, as they are using old rules based on different circumstances. The current inflation has arisen from various factors, including pandemic lockdowns, government overspending, low-interest rates, foreign workers leaving economies, businesses overcharging customers, and higher oil prices due to war and environmental concerns. The RBA has never started with a cash rate of 0.1%, nor have they raised interest rates so quickly and aggressively over such a short period of time. Additionally, a significant percentage of home loans are fixed, which reduces the impact of interest rate rises. Furthermore, the work-from-home trend and the increasing use of mobile phones and streaming services are also affecting spending patterns and production costs. All of these factors raise the question of whether inflation is decreasing faster than the RBA knows, making further rate rises unnecessary.
The decrease in international prices, combined with the impact of the mortgage cliff and 11 interest rate increases in under a year, raises questions about whether a cash rate of 3.85% is appropriate. Employment decreased slightly by 4,300, but unemployment rose from 3.5% to 3.7%, which is not enough to deter the RBA from further rate increases. Wage growth for the March quarter was lower than expected by economists and the RBA. This news may prevent a rate increase in June, and if negative trends continue, it could be the end of increased home loan repayments for those who have overborrowed with variable interest rates.
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