Australia Is Grappling With Accelerating Inflation: How Do Different Assets Respond To Interest Rates?

The US has been experiencing a positive inflation rate since the start of the year. It has resulted in high prices of essential commodities and services which has greatly impacted on the country’s economy. Unfortunately, the country has exported the inflation to many other countries including Australia.

So there are reasons for the affected countries to use relevant tools to battle stem out the problem. Continue reading to see how inflation relates with interest rates and stock markets.

Interest rate affects most sectors of the economy. It makes loans and mortgages expensive or cheaper depending on its direction. It also determines the number of money savers get paid on deposits they make.

Australia Is Grappling With Accelerating Inflation

A country’s central bank sets a country’s Interest rate. In most cases, banks sit after six months to review the rates. However, an emergency meeting can be called at any time to review interest rates.

How Interest Rates Relate With Inflation

Typically, interest rate and inflation have an inverse relationship. Loans become cheaper when the rate is low and expensive when the rate is high. So when it is low, corporates and individuals borrow more, and inflation starts rising. However, when the rates are high, the public borrows less, so inflation declines.

How Do Interest Rates Affect The Stock Market?

The stock market is impacted by inflation in many ways. Firstly, when there is too much money in supply, investors tend to buy more stocks. It pushes prices up and rewards the existing investors.

Raising interest rates slows inflation since loans, mortgages, and other borrowings from financial institutions become expensive. It reduces cash flows and makes businesses halt their expansion plans. The decision lowers stock prices in the affected markets.

Further, a rise in interest rates makes investing in certificate deposits and saving accounts attractive. It gives the conservatives an opportunity to invest, starving the stock market of cash. It forces the stock prices to plunge.

How Does Interest Rates Affect Cryptos?

Although research on how cryptos respond to interest rates is ongoing, The 2022 inflation shows that crypto prices plummeted as inflation rose. It obliterated the notion that crypto assets are a good hedge against inflation.

Available data shows that cryptocurrencies have responded to excess liquidity just the same way risky assets react to changes in interest rates. Thus, bank rate hikes are expected to mop up excess liquidity and lead to rising crypto prices.

Inflation In Australia

Australia is grappling with high inflation just like the rest of the world. But the country has experienced the lowest interest rates in the recent past.

Such low rates are believed to have spurred economic growth, which has forced the unemployment rate to fall to the lowest in 50 years. As a result, the Australian central bank has said there is a need to increase the interest rate to help stem out the rising inflation.

Australia’s Central Bank Proposes To Increase Interest Rates

The Reserve Bank of Australia has said that the current benchmark at 1.35% is way below the neutral rate. Such a rate is neither contractionary or expansionary. The Reserve Bank of Australia further states that the rate is too low for a country already facing periods of higher inflation. Therefore, the RBA is likely to raise it to stem inflation.

Note that at the start of July, RBA raised the benchmark rate by 0.5 percent to bring the rate to about 2.5 %. In August, it is expected to increase the rate by 0.75 percent to lift it to 3.25%.

These are stringent measures RBA believes will pull down inflation to 2-3percent. It will bail out the heavily indebted Australian households to help them cope with the rising cost of living and borrowing.

National Australia Bank Forecast

In its effort to control inflation, the National Australia Bank has forecast that its benchmark cash rate will likely hit 2.85% before the end of 2022.

The country is already grappling with rising inflation, and the recent drop in the unemployment rate has forced NAB to forecast a 50bp in August, followed by a 25bp in the subsequent two meetings.

Outlook and Conclusion

The Australian unemployment rate has fallen to less than 3.55%. This is the lowest it has ever come in 50 years. Therefore the Reserve bank is under pressure to raise the interest rate to sustain the level and put inflation in check.

According to analysts, such a low unemployment rate is attributed to a booming Australian economy and a tight labor market.

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About the author

Shazia Shaikh