{"id":2065,"date":"2022-03-09T05:15:38","date_gmt":"2022-03-09T05:15:38","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/war-in-europe-brings-threat-of-rampant-inflation-interest-rate-hikes\/"},"modified":"2022-03-09T05:15:38","modified_gmt":"2022-03-09T05:15:38","slug":"war-in-europe-brings-threat-of-rampant-inflation-interest-rate-hikes","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/war-in-europe-brings-threat-of-rampant-inflation-interest-rate-hikes\/","title":{"rendered":"War in Europe brings threat of rampant inflation, interest rate hikes"},"content":{"rendered":"

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Some of the most qualified commentators on Australian finance shared with API Magazine their views on the war in Europe and its ramifications for Australian consumers and the economy.<\/p>\n

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It has taken a war in Europe and the resultant humanitarian crisis to push the pandemic from global headlines and bring even more economic uncertainty to the world.<\/p>\n

As with a pandemic that at one point seemed restricted to China, Russia\u2019s incitement of war against Ukraine is having an impact well beyond Europe.<\/p>\n

Australians are already being squeezed at the petrol pump as international sanctions on Russia’s economy pile up, with fuel prices hitting new records.<\/p>\n

Central banks, including the Reserve Bank of Australia (RBA), are weighing up their interest rates strategies as inflation pushes and pulls at prices and it’s uncertain how effective they can be at contending with this crisis.<\/p>\n

These same inflationary pressures will have an impact on homeowners as rising interest rates and building material cost hikes take hold.<\/p>\n

Evan Lucas, Chief Market Strategist at InvestSMART, said energy, education, health, transport and food already consume about 60-65 per cent of household budgets.<\/p>\n

\u201cIf, as expected, inflation pushes this beyond 70 or 75 per cent of budgets, that\u2019s people spending less on renovations, delaying home purchases and no taking holidays,\u201d he said.<\/p>\n

He said food costs were likely to be hit as hard as fuel prices, given Ukraine and Russia combined account for 25 per cent of global wheat exports, and Ukraine alone for 13 per cent of corn exports.<\/p>\n

\u201cBread prices are already up 37 per cent since the start of the year and petrol is above two dollars a litre and these costs must be passed on to consumers.<\/p>\n

\u201cThe war in Europe is in the food bowl of the continent, and when you throw in the effect of floods in eastern Australia agriculture-related costs are going to soar.<\/p>\n

\u201cRenters in Australia currently average $160 to $200 for their weekly shop \u2013 this is set to rise to $175 to $225 and this hits everything, from the rental market to discretionary retail,\u201d Mr Lucas said.<\/p>\n

It is probably a good idea to fix at least part of your mortgage now.<\/span><\/p><\/blockquote>\n

– Stella Huangfu, Associate Professor, University of Sydney<\/p>\n

David Plank, Head of Australian Economics at ANZ Research, told Australian Property Investor Magazine <\/em>that all signs from the RBA point to rate increases later this year, once the RBA is satisfied that wages growth has accelerated in a sustainable fashion.<\/p>\n

\u201cWe have the RBA tightening from the third quarter of this year, with the cash rate reach 1.25 per cent by March 2023 and 2 per cent by the end of 2023 (from current 0.1 per cent),\u201d he said.<\/p>\n

RBA quandary<\/strong><\/p>\n

Sanctions against Russia will have a fantastically disproportionate impact on the Australian economy.<\/p>\n

Russia accounts for just 0.1\u00a0per cent of Australia’s merchandise trade, ranking\u00a042nd on the latter’s list of trading partners. It\u00a0ranks 29th in value ($723 million) for Australia’s merchandise exports. It ranks\u00a056th in value ($250 million) for merchandise imports to Australia.<\/p>\n

But Russia is the world\u2019s largest oil exporter and third-largest oil producer.<\/p>\n

Losing this supply on the world market would have major implications for inflation everywhere, but for the RBA the usual response of raising interest rates to suppress prices is unlikely to work in this scenario.<\/p>\n

Stella Huangfu, Associate Professor with the School of Economics at University of Sydney, said different types of inflation responded differently to Reserve Bank intervention.<\/p>\n

\u201cInflation can be driven by different factors – demand-driven inflation, supply-shock inflation, and expectation-driven inflation.<\/p>\n

\u201cThe recent rising inflation in Australia is mainly due to supply chain disruptions.<\/p>\n

\u201cAustralia has experienced shortages of durable goods, raw materials and more because of Covid and now Russia\u2019s invasion of Ukraine has put further pressure on the supply shortage.<\/p>\n

\u201cUnfortunately, a higher official rate will not solve the supply chain problem and hence will not ease this type of price pressure,\u201d Associate Professor Huangfu told API Magazine<\/em>.<\/p>\n

She did, however, add that if rising inflation has become a real concern for the RBA, then conventional monetary policy should still be implemented.<\/p>\n

\u201cIt certainly does not mean that a high interest rate will not reduce inflation at all \u2026 because a high interest rate will reduce both consumption and investment demand, and therefore alleviate inflationary pressure to some degree.\u201d<\/p>\n

Ms Huangfu said it was highly likely commercial banks would increase fixed and\/or variable rates at least once more\u00a0this year.<\/p>\n

\u201cAs a monetary economist, I will not be surprised if the RBA raises its official rate later this year.<\/p>\n

\u201cIt is probably a good idea to fix at least part of your mortgage now.\u201d<\/p>\n

Mr Plank agreed that while the initial impact of conventional monetary policy may be minimal, the RBA still had to act.<\/p>\n

\u201cThe usual approach for monetary policy is to look through the first-round effects on inflation caused by supply side disruptions,” he said.<\/p>\n

\u201cIt is the second-round effects via the impact on inflation expectations and pass-through from business that are the focus of policy, so while policy can do little in response to the initial impact, it can temper inflation expectations by signalling a clear intent to manage second round effects.\u201d<\/p>\n

InvestSMART<\/span>\u2019s Mr Evans was more specific about his RBA expectations.<\/p>\n

\u201cThe RBA has held for as long as possible and based on the wage, inflation and GDP data they will have at their disposal by November, I\u2019m expecting a rate increase on Melbourne Cup Day (first Tuesday in November),\u201d he said.<\/p>\n

Competing forces<\/strong><\/p>\n

As Ukraine and Russia\u2019s forces clash, competing forces are also at work in the Australian economy.<\/p>\n

As a major commodities and food exporter, there are potential counters to inflationary pressures.<\/p>\n

Russia is a major exporter of oil, grain and many other commodities including metal and energy. Restrictions on their export will substantially reduce the supply of these commodities.<\/p>\n

\u201cGiven the importance of oil and commodities in production and manufacturing, these high prices will contribute further to rising inflation in Australia, Associate Professor Huangfu said.<\/p>\n

But an expected offset may come in the form of the Australian dollar.<\/p>\n

Usually prone to depreciation in times of global turmoil, the war in Europe may prove to be a break in the currency\u2019s perception as a guest only invited when times are good.<\/p>\n

The value of Australia dollar against US dollar has risen 5 per cent since the end of January.<\/p>\n

\u201cThis is a direct result of the tough trade sanctions on Russia,\u201d Ms Huangfu said.<\/p>\n

\u201cRussia is a large exporter of many key commodities globally, so the Australian mining companies and agriculture sector benefit directly from the trade restrictions on Russia as the world is increasingly looking for alternative sources of supply.<\/p>\n

\u201cThe rising Australian dollar implies lower imported prices, which will alleviate inflationary pressures.\u201d<\/p>\n

\"Rental<\/p>\n

The final word should go to the RBA itself.<\/p>\n

RBA Governor Philip Lowe on Wednesday (9 March) said Australia was in a different situation to countries in Europe.<\/p>\n

\u201cIn Europe, this rise in commodity prices represents a negative shock to their terms of trade and thus to their national income and this alone will cause a slowdown in economic activity and CPI inflation to be higher than it would have otherwise been,\u201d he said.<\/p>\n

\u201cAustralia is in a different position because we export many of the commodities whose prices are rising.<\/p>\n

\u201cThis means that our terms of trade will rise over the months ahead, which will provide a boost to our national income.<\/p>\n

\u201cThis boost is likely to be evident mainly in the form of higher profits for companies in the resources sector and higher tax revenue.<\/p>\n

\u201cAt the same time, the rise in global oil prices is causing higher petrol prices at the bowser and this will eat into household budgets, push up costs for many businesses and crimp spending in some areas.<\/p>\n

\u201cGiven this, I expect that most of this extra national income will be saved, rather than flow through into higher spending.<\/p>\n

\u201cLooking beyond the impact on commodity markets, the war in Ukraine poses other significant downside risks for the global economy.<\/p>\n

\u201cFrom both a humanitarian and economic perspective, there is a lot riding on how events develop here.<\/p>\n<\/p><\/div>\n