After inflation reaching a 40-year high in the United States, the U.S. Federal Reserve raised interest rates in their March 2022 meeting for the first time since 2018. They increased the policy rate by a quarter percentage point from near zero (although some leading economists had argued for a half percentage point). Furthermore, while early this year economists expected three increases in the policy rate during 2022, now the Fed is expected to increase the rate six more times this year. Similarly, New Zealand and the United Kingdom are also expected to see their policy rates up. Clearly global interest rates are on the rise.

In Australia, the year-ended C.P.I. inflation (trimmed mean) remains at 3.5 (2.6) per cent as this is currently measured quarterly. Yesterday (March 30th), the Australian Bureau of Statistics released a note in which it’s stated that they will produce monthly indicators of wages and salaries and that the A.B.S. will examine the feasibility of a monthly C.P.I.. This would be a great innovation. Absent those figures, we know that the Australian economy is recovering strongly from the pandemic. Unemployment is at 4 per cent and expected to hit 3.75 per cent (a 50-year low) by September 2022. Currently, the Australian economy has 200,000 more job vacancies than before the pandemic. While wage growth remains moderate, the budget released just early this week is expansionary and could add to the inflationary pressures. The war in Ukraine has led to a massive humanitarian crisis. It is a great source of uncertainty and added (petrol and food) inflation to the world economy.

Within the next 3 to 6 months, we’ll see whether inflation in Australia remains within the 2 to 3 per cent target rate or whether it actually goes above target. Hopefully by then, the political and economic uncertainty is lower. Given all these, my view is that it is appropriate for the cash rate not to change in the next meeting. However, it will be also appropriate to spell out under which economic conditions the rate will increase as this may need to happen earlier than anticipated.