Australian Bond Exchange Weekly Newsletter
Friday 17 February 2023
- The interest rate stands at 3.35 per cent (AUS)
- The burden of interest rates is falling disproportionately on middle-income families (AUS)
- Inflation stands at 7.8 per cent (AUS)
- China’s recovery could hinder Australia in the form of higher rent prices due to higher demand from Chinese International students arriving in Australia (China)
- In the (U.S.) the Federal Reserve set the interest rate at 4.58 per cent
- The Harmonized Index of Consumer Prices (HICP) for the EU is 8.50 per cent as of January 2023 (EU)
- The Eurozone’s main interest rate stands at 3.0 per cent as of February
- Inflation in the U.K., as measured by the Consumer Prices Index including owner occupiers’ housing costs (CPIH), rose by 10.1 per cent in the 12 months to January 2023
- The current Bank of England (BOE) base rate is 4.0 per cent.
The interest rate stands at 3.35 per cent from 8 February 2023. The next monetary policy decision will be taken at the RBA Board meeting on 7 March 2023.
The burden of interest rate hikes is falling disproportionately on middle-income families. Middle-income households have an annual taxable income between $96,000 and $200,000, with the most significant group belonging to working-age couples with children.
About four million households fall into the middle-income bracket. Because of their number, they are the ones that drive the economy. “They are the people who are working, but also raising the next generation” (ABC News, 2023); they are also the most vulnerable to rate rises as they have higher levels of debt and rate hikes increase their mortgage payments which effectively reduces their disposable income.
As inflation hits 7.8 per cent in Australia, we will wait until March for the next interest rate decision from the RBA. Some economists like Lachlan Kerwood McCall have suggested that rather than have interest rates increase to stop consumers from spending to lower inflation (which effectively results in punishment to consumers and a prize for banks), there could be a special power on the RBA to quarantine a small portion of people’s weekly income (as suggested by British economist John Maynard Keynes), in a separate system to compulsory super.
Finally, a quick note on labor data, CBA economists expect employment to increase by 25k and the unemployment rate to remain at 3.5%.
China’s economy is recovering after it stopped its COVID-zero policy. It is possible that this recovery could impact Australia as the higher demand from China’s growth could put pressure on the supply chain, fuel prices and rents. It is expected that the arrival of international students from China could raise rent costs and work against RBA’s goal of reducing consumer spending.
United States (US)
In the U.S. the Federal Reserve set the interest rate at 4.58 per cent as of 13 February 2023. According to a new report by Fitch Ratings, the U.S. labour market is expected to weaken in 2023 due to the lagging effects of higher interest rates that will slow demand. Furthermore, although job growth was strong in January 2023, driven by the South, it is unlikely to be sustained. Job offers are still below pre-COVID levels. In terms of consumer confidence, US retail sales rebounded more than expected.
Based on information from the U.S. Bureau of Labor Statistics, the CPI for all items (monthly) increased by 0.5 per cent as shelter increased, while the CPI increased 6.4 per cent over the last 12 months to January 2023. Although inflation remains high, it has been declining continuously for seven months. Increasing inflation in the United States may increase prices worldwide and even put pressure on interest rates rising in Australia.
The EU’s inflation rate is measured using the weighted average of the Harmonised Index of Consumer Price (HICP) aggregates. The actual HICP for the EU is 8.50 per cent (January 2023), down from 9.20 per cent in December 2022. Moreover, the Eurozone main’s interest rate stands at 3 per cent as of February, raising borrowing costs to the highest since 2008.
The ECB is finally catching up with the US Fed and has become much more pro-active in fighting the out-of-control inflation throughout Europe.
We have come across an interesting fact – According to the European Commission, in 2020, the EU was Australia’s third-largest trading partner, and this position will be further strengthened by the current negotiations between the European Union and Australia on a potential Free Trade Agreement. This of course will further boost our export sector and should provide easier access for our goods and services and further diversify away from China.
Australia of course is a major export economy, and the recent global trend of reversing globalisation is a major ongoing challenge and requires major diplomatic efforts and negotiation skills.
United Kingdom (UK)
Inflation in the UK, measured by the “Consumer Prices Index including occupiers’ housing costs” (CPIH), rose by 8.8 per cent in the 12 months to January 2023.
The current Bank of England (BOE) base rate is 4 per cent, with the subsequent decision to be taken by the BOE on 23 March 2023. Higher interest rates in the U.K. could boost the currency in the country as investors would be encouraged to bring in investments, which would strengthen the pound, and imports would become cheaper for British families. On 17 December 2021, the UK and Australia signed the “Australia-United Kingdom Free Trade Agreement” (A-UKFTA) expected to create work and travel opportunities for citizens of both countries. UK’s trade with Australia was $30.3 billion (2018-19), as the UK has recently left the EU, this trade is a significant step to connect the UK with trade opportunities outside the EU.
Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. You should obtain the relevant appropriate document for any product mentioned and consider its contents before making any decision.
ABC News. (2023, 02 14). China’s economy is recovering- is that a good thing for Australians faced with surging prices? Retrieved 02 15, 2023, from https://www.abc.net.au/news/2023-02-14/chinas-economy-is-recovering-is-that-good-for-australias/101947242
ABC News. (2023, Feb 12). Is there a better way to kill inflation than rising interest rates? Retrieved from https://www.abc.net.au/news/2023-02-12/raising-interest-rates-reserve-and-bank-and-inflation-management/101952926
ABC News. (2023, 02 15). Middle-income families hit hard by inflation, interest rates could sink the economy. Retrieved from https://www.abc.net.au/news/2023-02-14/brt-middle-income-crunch-to-affect-broader-economy/101953128
Bank of England. (n.d.). Retrieved 02 15, 2023, from https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate
Board of Governors of the Federal Reserve System. (2023, 02 14). Selected Interest Rates. Retrieved 02 15, 2023, from https://www.federalreserve.gov/releases/h15/
Fitch Ratings. (2023, 02 14). U.S. Labor Demand will Weaken on Rising Interest Rates, South Dominated Jobs Recovery. Retrieved 02 15, 2023, from https://www.fitchratings.com/research/us-public-finance/us-labor-demand-will-weaken-on-rising-interest-rates-south-dominated-jobs-recovery-14-02-2023
Forbes Advisor. (2023, 02 15). Inflation & Interest Rates: US Price Rise Rate Edges Back to 6.4 per cent. Retrieved from https://www.forbes.com/uk/advisor/personal-finance/2023/02/14/inflation-rate-update/
Reserve Bank of Australia. (2023, 02 07). Statement by Philip Lowe, Governor: Monetary Policy Decision. Retrieved from https://www.rba.gov.au/media-releases/2023/mr-23-04.html
Reserve Bank of Australia. (n.d.). Cash Rate Target. Retrieved from https://www.rba.gov.au/statistics/cash-rate/
Trading Economics. (n.d.). Euro Area Inflation Rate. Retrieved 02 15, 2023, from https://tradingeconomics.com/euro-area/inflation-cpi#:~:text=The%20consumer%20price%20inflation%20rate%20in%20the%20Euro,February%29%20and%20energy%20%284.3%20percent%20vs%20-1.7%20percent%29.
Trading Economics. (n.d.). Euro Area Interest Rate. Retrieved 02 15, 2023, from https://tradingeconomics.com/euro-area/interest-rate