Following its March 2022 meeting, the U.S. Federal Reserve (Fed) announced an increase in policy rate by 25 basis points to 0.50 percent. In line with market expectations, it is the first increase in borrowing cost since 2018. Fund managers and economists believe Australia could follow suit soon.
The Fed’s move comes as inflation rages in the U.S. economy, hitting 7.9 percent in February 2022 – its highest annual rate in some 40 years. This elevated inflation is reflective of supply and demand imbalances related to the pandemic, higher energy prices, as well as broader price pressures.
However, indicators of economic activity and employment have continued to strengthen. Job gains have been robust in recent months and the unemployment rate edged down to 3.8 percent in February 2022, from 4 percent the previous month.
Shane Oliver, AMP Chief Economist, believes that the Reserve Bank of Australia (RBA) will soon follow the Fed in starting to lift interest rates.
“We expect the first hike to come in June taking the cash rate to 0.25 percent, with three hikes in total this year taking it to 0.75 percent by year end.
“They only move together if there is cyclical alignment and this year there is, with both the U.S. and Australia recovering from the pandemic, and seeing rising inflation.
“However, Australian interest rates are likely to rise less than U.S. interest rates reflecting lower inflation in Australia and the start of a downturn in Australian property prices, which will dampen the pressure to raise rates much.”
Russel Chesler, Head of Investments and Capital Markets, VanEck, said share markets in Australia and the U.S. could regain momentum in 2022, even as interest rates rise.
“The U.S. and Australian markets will probably take future rate rises in their stride, as these are expected and almost certain,” he said.
Chesler added that with the rise in global inflation impacting living standard across the world, “we expect real assets, including infrastructure, property, resources and gold equities to perform well in this environment.”
So more a question of when will the RBA raise rates, rather than – will it!
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