Next Tuesday, the RBA will increase the cash rate again, but it’s uncertain by just how much. Reuters is reporting RBA to raise rates a modest 25 bps in June, some call for 40 bps, where bps stands for basis points, which are one-hundredths of one percentage point. For my latest Economics Explored podcast episode, Morgans Chief Economist Michael Knox and I had a great conversation on the US and Australian economic outlooks, in which we considered the next moves for the US Federal Reserve and our RBA. Michael thinks the RBA is basically following the Fed and hence, on Tuesday, will push the cash rate up to 0.85%, a 50 basis points increase from the current cash rate of 0.35%. This will mean our cash rate will be practically the same as the US Effective Federal Funds Rate, currently at 0.83%. Michael is making a big call here. He appears to be the only market economist forecasting a 50 basis points hike. For sure, Michael will enter the economic forecasting hall of fame if he gets this one right.
You can listen to our conversation about future interest rate increases from 15:32 in episode 142 of my podcast via podcast apps, including Google Podcasts and Apple Podcasts, or using the embedded player below. Of course, I’d recommend you listen to the whole episode for a whole bunch of great insights from Michael, who is one of Australia’s top market economists and commentators. You may also be interested in Michael’s recent economic research notes which I’ve linked to in the show notes, one of which is Watch the RBA copy the FED.
Next week’s cash rate increase won’t be the last one. Michael is expecting the Australian cash rate will (or, more precisely, should) end up at 2.6% by the end of the year, to match what he’s forecasting the Effective Funds Rate will end up at (i.e. 2.58%). Incidentally, rising interest rates across the economy will of course impact housing credit and house prices which are already starting to fall, although Brisbane house prices have temporarily defied the national trend for capital cities (see the ABS News report House prices fall for the first time in nearly two years as rising interest rates bite).
Despite rising interest rates, both Michael and I are very optimistic about the US and Australian economies, but it goes without saying that the unexpected can always occur. The so-called east coast energy crisis is something that could compromise the economic outlook if the new federal government can’t come up with a convincing response next week. I’ll aim to cover this issue in a future post, after I’ve weighed up all the evidence and the competing claims from the different sides in the debate.
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