New Zealand markets closed
  • NZX 50

    11,596.03
    -21.11 (-0.18%)
     
  • NZD/USD

    0.6416
    +0.0036 (+0.56%)
     
  • NZD/EUR

    0.6085
    +0.0049 (+0.82%)
     
  • ALL ORDS

    7,406.30
    +36.90 (+0.50%)
     
  • ASX 200

    7,213.20
    +37.70 (+0.53%)
     
  • OIL

    71.59
    +0.13 (+0.18%)
     
  • GOLD

    1,809.40
    +7.90 (+0.44%)
     
  • NASDAQ

    11,563.33
    -74.17 (-0.64%)
     
  • FTSE

    7,476.63
    +4.46 (+0.06%)
     
  • Dow Jones

    33,476.46
    -305.02 (-0.90%)
     
  • DAX

    14,370.72
    +106.16 (+0.74%)
     
  • Hang Seng

    19,900.87
    +450.64 (+2.32%)
     
  • NIKKEI 225

    27,901.01
    +326.58 (+1.18%)
     
  • NZD/JPY

    87.5910
    +0.4920 (+0.56%)
     

Interest rate rises: Why the end is nearly in sight

Interest rates: Reserve Bank of Australia (RBA) Governor Philip Lowe.
RBA Governor Philip Lowe may not hike interest rates as high as the market was predicting. (Source: Getty)

The Australian and global economies have moved to a precarious position in the last month or two which has far-reaching implications for the future course of monetary policy, economic growth, unemployment and inflation.

In simple terms, economic growth is slowing and employment conditions around the world have stopped improving and in some instances, could be in the early stages of a turning point towards weakness.

And while most measures of consumer price inflation (CPI) remain markedly above the targets of all major central banks, there is undeniable evidence that inflation is about to fall about as quickly as it rose from the low point in 2021.

Also by the Kouk:

Indeed, inflation in late 2023 or early 2024 will be back to levels consistent with target levels which will help deliver a return to increases in real wages.

These reasons are why the smart investors are viewing the turmoil in bond and stock markets as an opportunity to buy in, just as the scaredy-cat investors sell at what look to be ridiculous levels.

The RBA

In Australia, these broad global trends are evident.

The RBA basically acknowledged this in its decision to hike official interest rates 25 basis points, a move which takes rates to 2.60 per cent, up 250 basis points since May 2022.

Most of the market participants were fighting yesterday’s war, expecting a 50 point rise with many more to come as they focussed on past inflation and not the outlook.

It seems that the RBA does not want to follow the foolishly aggressive monetary policy hawkishness from other central banks, especially the US Federal Reserve, who are hiking rates and delivering hawkish guidance because of inflation and labour market tightness three to six months ago.

It is clear that for Australia, at least, the end of the interest rate hiking cycle is near.

The RBA may well have only one more rate hike to go in the remainder of 2022 before it has a long term pause with the peak cash rate at around 2.80 per cent.

Why the halt in rate rises?

Economic growth is slowing and inflation is set to fall and current policy settings are almost at a point that will help ensure inflation returning to the RBA’s 2 to 3 per cent target for inflation in the second half of 2023.

The labour market, whilst strong, is set to weaken a little on the back of slower growth. At the same time, all the signals from the Albanese government are that the budget on 25 October will deliver a tightening in fiscal policy and with that help inflation to fall with the other benefit of starting to fix the budget.

Abandoning the economically absurd Stage 3 income tax cuts would help lock this in.

Supply chain issues which were one factor in the 2021 and 2022 inflation blow out are turning. Freight shipping costs have dropped, computer chips are readily available and there is a looming glut in cars.

The commodity price cycle is clearly turning down.

And while you may not directly buy much copper, timber, crude oil or steel, many of the manufactured items you do buy include these items in the production process.

One of the reasons why inflation surged so sharply in 2022 was the incredible lift in commodity prices which fed into production costs and therefore selling prices for petrol, cars, whitegoods and houses.

And while the commodity price fall will take a little time to show up in consumer prices – the amount you and I pay for everyday items – it will show up.

The following table shows quite starkly the extent of the falls in a number of commodities from their recent peak:

Item* Price change from peak - %; US$

Oil

-30%

Copper

-21%

Lumber

-68%

Natural gas

-45%

Coal

-12%

Freight shipping

-67%

Wheat

-25%

Iron ore

-38%

The Overall Index

-15%

Sources: Freightos, Commodity Research Bureau

*All items in US$

The next few monthly labour force releases will help determine whether the RBA is in fact near the end of its tightening cycle.

The inflation data from November and December will be the next instalment on this outlook.

For now, with 250 basis points of hikes, a budget tightening in the offing, slower growth and weaker commodity prices coming through, the RBA is close to the end of its rate hiking cycle.

Stay tuned.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.