Temporary inflation: Australia’s interest rate hike could happen sooner

Our economy depends on interest rates not rising for 18 months, but there is growing concern that no one has a clue as to what will actually happen.

The reality is arguably quite different, as the RBA continues to insist that rate hikes will not take place for “at least three years.”

In words New every day Columnist and economic commentator Alan Kohler said: No one does. “

We are in a completely unknown waters and the financial system and economy are very distorted. All of this is underpinned by a projected federal deficit of $ 4 billion a week and nearly $ 2 billion a week in RBA bond purchases.

Inflation is higher than expected by the RBA, and supply chain-led inflation and a much tighter labor market than expected could force rate hikes several years earlier than expected.

However, the global economy could struggle terribly as China’s economy slows and the last government stimulus is supplied through the system towards the end of the year. It may see the RBA reduce the cash rate to 0%, or perhaps even the negative interest rate.

The truth is that we don’t know, and anticipating the unexpected may be rewarding.

What does temporary inflation really mean?

From Australia’s own Martin Place to the US Congress Hall, there’s one word that central bankers use overwhelmingly to explain the continued rise in inflation. It is “temporary”.

A nearly universal consensus among central bankers in the western world is that current inflationary pressures are temporary, temporary and will pass. Therefore, it justifies not raising interest rates for the next few years.

Broadly speaking, economists generally agree that it will take at least 18 months before rate hikes can be seen. However, there are quite large elephants in the room.

Does that mean a six-month sharp rise in prices that far exceeds the central bank’s inflation target? 9 Months? Or is it longer than that?

So far, central bankers are generally tight-lipped because of the ambiguity in how they define the word “temporary,” and there is plenty of room to shift comments.

Relation: An impending disaster in the Australian housing market

But central banks aren’t the only ones to set interest rates on credit markets and mortgage borrowers. In the future, if the global bond market runs out of patience with the promise that inflation is temporary, it could push up all the borrowing costs of banks and mortgage holders on its own.

And there are many forces that can sustain higher inflation for longer than central banks expect.

Prolonged supply chain problems

Decades ago, companies once had vast warehouses filled with inventories to ensure they met their commitment to retailers and suppliers.

However, in an era of world trade defined by a “just-in-time” business model, many companies suddenly realized that they did not have the raw materials and finished products they needed to meet their demand.

It’s probably not surprising that manufacturers, logistics companies, and the maritime freight industry have been buckled under tension after tens of trillions of dollars have been invested in the global economy over the past year.

Today’s global manufacturing and logistics networks are unable to meet current demand and there are no quick or easy fixes.

At the Pearl River Delta berth in the south of Hong Kong and in the Chinese metropolis Shenzhen, more container ships are now waiting to dock than during the pandemic impact on China last February.

Relation: Chinese photos reveal an imminent disaster

As a result of these factors and the outbreak of deltacoronavirus variants in southern China, transportation costs have skyrocketed to record highs.

For example, in mid-2020, shipping a 40-foot container from Shanghai to Rotterdam cost less than $ 2,600, but today it costs more than $ 16,300.

The same is true for shipping from China to the western United States, where 40-foot containers from Shanghai to Los Angeles have risen from about $ 2,600 in the third quarter of 2020 to $ 15,820 today.

Some companies have reportedly charged $ 26,800 for shipments of containers booked from China to the western United States at the last minute.

Immigration, inflation, rate hikes

When Treasury Secretary Josh Frydenberg handed over the federal budget in May, it included a forecast that the unemployment rate at the end of the fiscal year 2021-22 would remain at 5%.

But when ABS announced the May unemployment rate a few weeks ago, Australians were pleasantly shocked. The country’s unemployment rate fell 0.4% in just one month to just 5.1%, almost meeting the Treasury’s forecast before the start of fiscal year 2021-22.

Relation: Sign Australia is heading for a disaster

There are various factors that have contributed to the recovery of the labor market, such as government stimulus and ironically the closure of borders, but another major factor that can push the country’s unemployment rate to historically low levels. there is. It’s low immigration.

Today, Australia’s available workforce pool has shrunk significantly as borders have been closed for more than 15 months. Between Australians and temporary visa holders leaving the country forever and reversing net international migration, Australia has more than a million fewer people than it would have been without a pandemic.

Even after eliminating people under the working age, not allowed to work, or without a workforce, the reduction in the size of the country’s workforce pool is decisive behind the recovery of a strong labor market. It remains a driving force.

Continued sharp declines in unemployment could put upward pressure on wages before the border reopens in mid-2022.

The RBA expects relatively weak wage increases, at least for the next few years, so a shock of higher-than-expected wage increases could put upward pressure on interest rates.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

Temporary inflation: Australia’s interest rate hike could happen sooner

Source link Temporary inflation: Australia’s interest rate hike could happen sooner

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