Tomorrow will bring with it our latest inflation number and economists are expecting a big jump, with supply chain problems linked to the Coronavirus generally and the Omicron variant recently. If the data is dramatically high, it could change the market perception of when the Reserve Bank will start raising rates.
Economists think the December quarter number that we’ll see tomorrow will be 0.7%, which would take the annual rate of core inflation to 2.4%. This would be higher than the RBA’s forecast of 2.25% and is well into the band of inflation the central bank wants before it said it would raise interest rates.
But let’s keep this ‘interest rates to rise’ story in context.
Ever since the Coronavirus undermined economies and stock markets, the RBA has been regularly telling us that rates wouldn’t rise until 2024. It wanted wage rises and inflation well into the 2% to 3% band before it would move to raise interest rates from the historically low 0.1% cash rate.
Over last year, the RBA was less glued to its 2024 date for raising rates because the economy showed how it would rebound after lockdowns and restrictions linked to the virus were taken away.
The CBA team of economists has been predicting a November 2022 rate rise and recently Westpac’s Bill Evans has gone for a 15 basis point rise this August. I think we’ll see the cash rate up to 0.5% by year’s end. If that happens, home loan interest rates will be at least 0.4% higher.
But wait, there’s even more worrying news for the overborrowed.
The bond market thinks the RBA could raise rates by 0.5% by August and 1% by December!
I think this is too bullish but if Omicron disappears quicker than expected and a big boom takes off for the rest of 2022, the RBA could easily be under pressure.
Also, if supply chain problems continue to force inflation up, as we’re prepared to spend that $60bn in savings that Treasurer Josh Frydenberg says we’ve saved up since the pandemic hit, then the RBA would have even more reason to raise interest rates earlier than expected.
All this comes as the US Federal Reserve meets on interest rates this week. ‘Rates set to rise soon’ headlines explain why stock markets are selling off now and why bitcoin has gone from $89,000 to $49,000 since November.
Rising rates usually hit stocks but provided there’s a big economic boom, then falling stock prices will provide a buying opportunity for the brave short-term player and the patient long-term investor.
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