With interest rates rising last week in the US, where to from here and what is the effect? Firstly already factored into markets is the fact that the Reserve Bank (RBA) will look to raise rates by 0.25% in June with another two hikes during the course of the year to bring it to an overall 0.75% increase. That is the expectation that is already factored in.
The wildcard is the inflation risk. Before it was thought that inflation was transitory and now that looks not to be the case – in fact, it is anything but. Rather the US has already got 6-7% inflation baked in. While our inflation rate is less than that for the time being, it may not remain the case. Last week I wrote of the effects of the Ukraine crisis and the benefits for Australia in that commodity prices and corporate profits in this country will only continue to increase. For that reason, the RBA is trying to master an ultimate balancing act – keeping inflation in control by raising rates while at the same time trying not to dampen optimism while also dealing with a Government in an election year that will be bent on splashing more cash around. I maintain that we are still in phase two of a bull market that took effect in April/May 2020 following the pandemic induced recession and market correction.
We had a massive market turnaround (the fastest in history). Businesses want to employ but finding people is hard. Businesses are optimistic – there are opportunities and demand is high and profitability and margins are high. The issue will be when optimism becomes euphoria and prices escalate upwards dramatically. I know we are not there, and hopefully, we will not get there. That’s the trick though – keeping a lid on things and trying to keep things moving along is a difficult act without tipping the bucket over.
Interesting times – be cautious.