Author: Viktoriya Kravets

As the dust settles from our post-Australia Day celebrations, we ease into the New Year refreshed and invigorated with our resolutions and plans in motion. We begin to reflect on and update our personal and financial goals for the year and ponder the new year challenges for all of us.

The New Year brings a significant concern for businesses, mortgage holders and consumers. It brings much speculation and uncertainty regarding whether further interest increases will work to stabilise inflation or ultimately tip the Australian economy into a recession.

Despite the rhetoric from central bankers and global leaders blaming the world’s current economic woes on inflation, a war in Europe, an energy crisis and irrational consumer sentiment, there is an obvious alternate root cause to the world’s current financial dilemmas.

Higher Interest Rates
Excessive use of monetary loosening during the COVID-19 era has resulted in skyrocketing inflation. Unfortunately, there is not a clear antidote to this other than placing our faith in the blunt economic instrument of interest rates.

For the past 40 years, inflation in the western world has not triggered any emotion…until now. Naturally, the question we must ask is: What exactly has caused the sudden panic, fear, and obsession with the subject of inflation?

In central banks’ pursuit of taming inflation, we have seen the blunt instrument of raising interest rates being applied worldwide. This has negatively impacted most asset classes, especially property and shares.

Paul Miron discusses current trends in inflation and interest rates.

As we return to work after a Federal Election and the appointment of a new government, there still seems to be no end in sight regarding the war in Ukraine…not to mention an energy crisis, world food shortages, supply chain issues…COVID-19…and rising costs of living, with persistent high inflation, and to top it all off – the prospect of further interest rate hikes. It seems that our economic future has never been more uncertain. Or are things really all that bad for investors?

Amidst a war in Eastern Europe, our central bank is grappling with the impacts of a rising cost of living, a severe energy crisis (not experienced since the 1970s), official inflation hitting 3.5%, and lastly, COVID-19 and its variant accomplices. This is not to mention the constant heartaches inflicted by fires and floods over the past three years and their financial implications on the economy.

Thus, we must ask ourselves – how will this impact everyday Australians? What will be the effect on interest rates, property prices and the general economy?

From an economic standpoint, it certainly seems we are headed in the right direction. We are getting the upper hand in living with the virus, international borders are reopening, and Australia is once again welcoming tourists, students, and migrants. The RBA has modelled that unemployment is at 4.25% and heading to sub-4%, the lowest we have experienced for decades – with GDP growth forecasts recently revised upwards to 4.25%.

Despite the economy recovering strongly enough to support the tapering of fiscal and monetary policies, the prospect of this happening has sent the market into a tailspin due to fears of immediate interest rate increases and inflation getting out of control.