Signs Australian interest rate hike could take place sooner
While the RBA continues to insist that rate hikes will not happen “for at least three years,” the reality is arguably quite different.
In the words of New Daily Business columnist and commentator Alan Kohler: “The RBA has absolutely no idea what’s going to happen. Nobody does. “
We are in completely unknown waters, with a heavily skewed financial system and economy. All supported by $ 4 billion per week in RBA bond purchases and an expected federal deficit of nearly $ 2 billion per week.
Inflation may skyrocket higher than RBA forecast, forcing rate hikes years earlier than expected due to supply chain-induced inflation and a labor market much more tense than expected.
However, it is also possible that the global economy will experience serious difficulties as the Chinese economy slows and the government’s latest stimulus measures fuel the system towards the end of the year. It could even see the RBA cut the spot rate to 0% or maybe even negative interest rates.
The truth is, we don’t know and it can pay off to expect the unexpected.
What does transitory inflation really mean?
From Martin Square in Australia to the halls of Congress in the United States, there is one word central bankers use overwhelmingly to describe the continued rise in inflation – “transient.”
The almost universal consensus among central bankers in the Western world is that current inflationary pressures are transient – temporary and will pass – and therefore justify not raising interest rates for years to come.
Generally speaking, economists generally agree that it will be at least 18 months before we start to see rate hikes. But there is a rather big elephant in the room.
Does that mean another six months of rapid price hikes well above the central bank’s inflation targets? Nine months? Or even longer than that?
So far, this is an issue central bankers have generally been quiet about, allowing themselves a lot of leeway to shift their commentary, due to the ambiguity of how they define the word ‘transient’.
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But central banks aren’t the only players in setting interest rates for credit markets and mortgage borrowers. If, eventually, global bond markets get impatient with promises that inflation is temporary, then they could increase borrowing costs for banks and mortgage holders.
And there are a number of forces that can keep inflation higher for longer than central bankers expect.
Supply chain issues longer
In decades past, companies once had large warehouses stocked with inventory to ensure that their commitments to retailers or suppliers were met.
But in the era of global commerce defined by the “just-in-time” business model, many companies suddenly found themselves without the raw materials and finished products needed to meet demand.
After tens of billions of dollars have been pumped into the global economy over the past year, it may come as no surprise that manufacturers, logistics companies and the ocean freight industry have grown. collapse under pressure.
Today’s global manufacturing and logistics network is simply unable to keep up with today’s demand, and there are no quick or easy fixes.
In the Pearl River Delta anchorage south of Hong Kong and in the Chinese megalopolis of Shenzhen, there are currently more container ships awaiting docking than at the height of the pandemic’s impact. on China in February of last year.
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Due to these factors and an outbreak of the Delta coronavirus variant in southern China, shipping costs have skyrocketed to record highs.
For example, in mid-2020 it cost less than $ 2,600 to ship a 40ft container from Shanghai to Rotterdam, today it costs over $ 16,300.
It’s a similar story for shipping from China to the western United States, with a 40ft container from Shanghai to Los Angeles dropping from around $ 2,600 in Q3 2020 to $ 15,820 today. hui.
There are reports that some companies are being charged up to $ 26,800 for reserved container loads from China to the western United States at the last minute.
Immigration, inflation and rising rates
When Treasurer Josh Frydenberg released the federal budget in May, he predicted unemployment would remain at 5% by the end of fiscal year 2021-2022.
However, when the ABS released May unemployment figures a few weeks ago, Australians received a pleasant shock. The country’s unemployment rate fell 0.4% in a single month to 5.1%, almost hitting the Treasury forecast even before the start of the 2021-2022 fiscal year.
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While a number of different factors have contributed to the labor market recovery, such as government stimulus measures and ironic border closures, there is another major factor that could push the country’s unemployment rate towards historic lows – low immigration.
With international borders now closed for more than 15 months, the available labor pool in Australia has shrunk considerably. Between Australians and temporary visa holders leaving the country permanently and the reversal of net international migration, there are more than a million fewer people in Australia than there would have been without the pandemic.
Even after removing those who are not of working age, are not allowed to work, or are not in the labor force, the reduction in the size of the country’s labor pool remains a factor. determinant of the strong recovery of the labor market.
If the unemployment rate continues on its rapidly declining trend, we might see upward pressure on wages before international borders reopen in mid-2022.
With the RBA forecasting relatively weak wage growth for at least the next few years, the shock of above-estimated wage growth could put upward pressure on interest rates.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter