Economists’ eyes will remain focused on the Reserve Bank of Australia throughout this quarter and whether it will continue to push interest rates ever higher in its continued battle to reduce the domestic rate of inflation.

The Consumer Price Index slowed from 7.4 per cent to 6.8 per cent for the year to February with prices increasing by just 0.2 per cent for the month of February itself, raising hopes the Reserve Bank might halt any further interest rate increases.

Forecasters though remain divided on the outlook for interest rates. Some point to the low inflation rate recorded for the month of February and say the back has been broken regarding the recent price hikes of the past year, and that any further rate rises will risk tipping the domestic economy into recession with local activity already stalling in key industries such as the housing construction industry, local tourism and other recreational industries.

Others though point to the fact inflation remains above the Reserve Bank’s preferred inflation range of between 2 and 3 per cent and that consumer spending remains high despite recent rate hikes.

Recession fears are also growing, given the ACTU’s push this year for a 7 per cent increase in the minimum wage from $21.38 an hour to $22.88, taking the minimum wage to $45,337 a year for some 2.4 million workers – a pay rise of some $3,000 a year, causing concerns any such move could spark a wage rise – price hike spiral, reminiscent of the 1970’s.

Meanwhile, the Federal Government is set to release its first full year budget this quarter. The overriding concern is whether the Government will take this opportunity to deal with the significant structural funding issues within the budget and so start to haul in the Federal deficit. All at a time, when the Government is equally committed to spending billions helping the domestic economy transition away from fossil fuel energy sources and embark on building a new low carbon economy.

Meanwhile, a growing number of economists believe the US economy will most certainly fall into recession sometime this year, as its central bank also deals with a blow-out in domestic inflation by increasing local interest rates.

While US employment figures remain strong, the recent US rate hikes have put undue pressure on several US and international banks, causing the collapse of two high profile banks in recent months.

Despite all the concerns noted above, this quarter has been a strong one for share markets here and abroad, suggesting markets are indeed forward-looking and anticipate an eventual end to the high inflation and interest rate rises we have been experiencing.

The outlook and implications for investors

The year ahead is likely to see easing inflation pressures, central banks moving to get off the brakes and economic growth weakening but stronger than feared. This along with improved valuations should make for better returns than in 2022. But as we are seeing there will be bumps on the way – particularly regarding interest rates, recession risks and geopolitical concerns.

We remain “cautiously optimistic” and in light of the above factors, continue to suggest a diversified, long-term approach will produce results over time.

Published : 18 Apr 2023