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'Brisbane Economists Predict Interest Rates Hike Amid Inflation Concerns'

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"The recent buzz about rising inflation and its implications for interest rates might be overstated.

Despite inflation surpassing the RBA's target range, a closer look reveals underlying factors that could prompt a downward shift in interest rates sooner than expected.

The quarterly CPI spike to 3.6% and the uptick in non-discretionary inflation are concerning.  However, discretionary spending, particularly on optional items like insurance, is the real driver behind the surge.  This suggests that inflation is more a result of uncontrollable cost increases than excessive consumer spending.

Contrary to expectations, rising interest rates are unlikely to have a significant impact on consumer behaviour.  Many households are already financially strained, as evidenced by a recent downturn in retail spending.  Additionally, the US's robust household consumption is partially attributed to fixed home loans, shielding existing borrowers from rate hikes.Australia's elevated inflation expectations, fuelled by the RBA's commentary, have long exceeded actual CPI figures.  This perception of higher inflation due to consumer behaviour may not hold true upon closer examination.

Moving beyond the rhetoric, several key factors – the elephants in the room - point towards a potential downward shift in interest rates:

  1. Population Growth: Australia's unexpected surge in population has inflated demand, contributing to higher prices.  While long-term immigration can dampen inflation, short-term spikes create inflationary pressures.

  2. Mortgage Rate Dynamics: With low fixed-rate loans expiring, outstanding mortgage rates are set to rise, adding financial strain on households.  This tightening could curb demand and influence inflation dynamics.

  3. Labor Market Realities:  Official unemployment rates mask broader challenges, with alternative surveys revealing higher unemployment and underemployment rates. Nearly 900,000 Australians on work-related support highlight underlying job market difficulties.

Looking ahead, substantial job creation is needed to stabilize unemployment rates. However, recent trends indicate a shortfall in job opportunities, exacerbating labour market challenges.

Despite these hurdles, the private sector's resilience drives productivity growth, albeit amidst governmental reforms impacting business operations.

Considering these factors, a cash rate increase seems improbable. The RBA may adopt a tightening bias, but indications favour rate cuts. Financial markets anticipate rate reductions, potentially starting in late 2024 or early 2025.

If realised, successive rate cuts could lower the cash rate significantly by late 2025, easing financial burdens for borrowers.

However, risks remain, including geopolitical tensions and potential inflation slowdowns, necessitating agile monetary policy responses." - Matusik Missive

Full post at - Matusik Missive

Brisbane Economists Predict Interest Rates Hike Amid Inflation Concerns


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