Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Rising inflation and where will rates go?
Inflation expectations are pointing to a decade high of about 5.0 percent by mid-year going by events that are currently unfolding. The war in Ukraine is deepening and the floods in NSW and Queensland have inundated towns and created havoc. These events are increasing the cost-of-living pressures across the country and will lead to a massive insurance pay-out bill for the big three insurers.
Crude oil prices have skyrocketed by almost 21 per cent to US$130 a barrel last week, as a direct result of the war in Ukraine. The Australian Institute of Petroleum (AIP) said on Monday “the national average price for unleaded petrol struck another record in the past week, rising 3.3 cents to 183.9 cents per litre”. It won’t be long before petrol prices hit $2.10 a litre. And it’s not just oil and energy prices that have risen; prices for commodities like iron ore, coal and wheat have all gone up as a result of Russia’s invasion of Ukraine.
According to a Roy Morgan survey in January 2022, Australians expect inflation of 4.9% annually over the next two years. The level of inflation expectations in January equals the seven-year high reached in November 2021. The last time inflation was 5% was in 2008, when oil prices hit $US160 a barrel. The most recent inflation reading saw annual inflation come in at 3.5%, above the Reserve Bank’s 2.0%-3.0% target band.
There’s no doubt this will raise a few eyebrows, and the Reserve Bank of Australia (RBA) will need to question whether raising rates is warranted.
But, unlike in the US, wages haven’t risen in line with prices. RBA governor Philip Lowe has made it clear that interest rates will not rise until wages rise. He also said the RBA would “see through” rising inflation caused by temporary events.
The RBA said: “Wages growth has picked-up but, at the aggregate level, is only around the relatively low rates prevailing before the pandemic. A further pick-up in wages growth and broader measures of labour costs is expected as the labour market tightens. This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of labour costs at historically low levels of unemployment.”
Despite rising US interest rates, the RBA is cautious not to lift rates too early. Such a move could hurt borrowers and the economy. Despite this, the banks are expecting rates to go up mid-year. CBA is tipping official interest rates will rise by 15-basis points.
Major bank rate hike predictions
- ANZ: September 2022
- CommBank: June 2022
- NAB: November 2022
- Westpac: August 2022
So, is it a time to be concerned?
Despite all the brouhaha about soaring inflation, the RBA doesn’t seem the least bit worried. It says it is prepared to look-through short term temporary events and “is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target.”
The message is that inflation is rising, but well below that of the US. With two CPI readings remaining (March & June Q), we think it’s likely that the RBA won’t move until at least the board meeting on August 2.
