Australian shares are expected to drop sharply, following New York's lead.
The RBA is working to slow inflation by raising rates.
The Reserve Bank of Australia (RBA) has raised the cash rate by 0.25% to 1.5%, in an effort to slow inflationary pressures in the economy. This follows a similar move by the US Federal Reserve, which hiked rates by 0.25% last week. The RBA's decision was widely expected by economists, although some had predicted a more aggressive move of 0.5%.
However, this may not be enough to avert a sharp drop in share prices.
The Australian share market is expected to drop sharply following Wall Street's lead, with the Dow Jones Industrial Average falling over 400 points overnight. This comes after a weak start to the week for global markets, as concerns about trade tensions and higher interest rates continue to weigh on investor sentiment.
US economy faces similar problems.
Consumption remains strong, driving inflation.
In the United States, consumption has remained strong despite rising interest rates. This has put pressure on the Federal Reserve to keep rates high in order to slow inflation. However, while acknowledging there is a slow squeeze on consumers, de Bruin believes there remains a buffer for a soft landing. If consumption does pop down, de Bruin believes the US is still in the mid-3.5% inflation range.
RBA actions may not be enough to slow consumption.
The RBA's actions may not be enough to slow consumption in Australia. This is because the RBA is only one of many factors that influence interest rates. Other factors include the federal funds rate and the yield on 10-year Treasury bonds. The RBA may need to take more aggressive action if it wants to slow consumption and prevent a sharp drop in share prices.
US is at risk of stagflation.
The US economy faces similar problems to Australia, but it is at risk of stagflation. This is because the US economy is larger and more complex than Australia's economy. Additionally, the US has already experienced two quarters of negative economic growth, which means it is closer to a recession than Australia is.
Australia is better placed than the US.
While there is upward pressure on wages, we are well short of established stagflation.
There is no doubt that Australia is facing some challenges when it comes to inflation. However, it is important to remember that we are not yet in the same situation as the US. While there is upward pressure on wages, we are still a long way from reaching the point of stagflation. This is due to a number of factors, including our strong export sector and the fact that our economy is not as reliant on consumer spending.
Markets are predicting rates will come down next year.
One silver lining for Australia is that markets are predicting interest rates will start to come down next year. This will provide some relief for households who have been struggling with higher costs of living. It will also help to encourage more spending and investment, which should help to boost economic growth.