Home » Why further RBA interest rate hikes are less likely now than even one week ago

Why further RBA interest rate hikes are less likely now than even one week ago

Since Australia’s Reserve Bank hiked interest rates two weeks ago, there have been two important developments — one in the United States and the other in the United Kingdom.

If it’s not clear to you why events overseas influence Australia’s interest rates, which are meant to be set to control Australian inflation, read on.

US and UK inflation close to zero

We haven’t been complete masters of our own destiny since the Australian dollar was floated 40 years ago next month.

What happened in the US last Tuesday was news of dramatically lower US inflation. When increases and decreases in prices were taken together, overall US prices moved not at all in the month of October. That’s right, inflation was zero.

While zero movement in one month doesn’t mean zero over the entire year, it helps bring down the rate over the entire year. US inflation fell from 3.7 per cent in the year to September to 3.2 per cent in the month to October.

Then the next day we got similar news from the UK.

Taken together, prices in the United Kingdom scarcely grew at all in October, climbing just 0.1 per cent. The screeching halt to UK monthly inflation took the annual rate down from 6.7 per cent for the year to September to 4.6 per cent for the year to October.

In both the US and the UK, there’s talk there will be no need for further interest rate hikes — and very probably a case for interest rate cuts — as soon as next year.

We don’t yet know what happened to Australia’s inflation rate in October — the Bureau of Statistics will tell us next week.

But we have an early indication.

The Melbourne Institute inflation gauge, which roughly tracks the bureau’s measure, fell 0.1 per cent in October. If that is what the bureau finds — that overall prices barely moved (or fell) in October — Australia’s annual inflation rate should fall from 5.6 per cent for the year to September to around 5.2 per cent for the year to October.

Inflation down all over

All over the world, inflation is falling for much the same set of reasons: the price of oil is heading back down after Saudi Arabia and Russia tried to restrict supply in the middle of the year, and the price pressures caused by shortages are easing.