Interest rates: risks abound

The Australian: Risks abound in acting too soon to lift interest rates.

“the RBA must decide how much of the price growth was driven by supply constraints caused by the pandemic.”

As inflationary pressures build here and overseas, financial markets are betting the Reserve Bank of Australia will be forced to lift interest rates quicker than its guidance suggests. When the nation was in the depths of uncertainty about the pandemic in 2020, the RBA said it would not lift the official rate from the emergency low of 0.1 per cent until at least 2024. Since that time, things clearly have changed, with the Australian economy staging a strong rebound and a rapid rise in inflation around the world becoming a key focus of attention, particularly for the US Federal Reserve.

The RBA has conceded that rates might need to start rising in 2023, but money market traders have been repricing bonds in anticipation that the Reserve will be forced to act this year. In recent months, major banks have been lifting interest rates on fixed-rate mortgages as their cost of money has increased in global wholesale markets. With the release of higher than expected inflation figures on Tuesday, financial markets are betting the RBA will be forced to start lifting rates from August. This may turn out to be the case, but it is a fact of life that market traders and analysts can get it wrong.

As Eric Johnston reports, it is the detail of the inflation picture that matters. Certainly the inflation breakout is a bigger concern for the Fed, where inflation is running at 7 per cent – its highest level since 1982. The Fed must find a way to normalise interest rate settings without prompting the market disruptions of earlier attempts to end quantitative easing.

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