Interest rates on hold despite inflation

1 year ago•By Rachel Wallace

Interest rates on hold despite inflation ticking upwards in August.

Inflation rose in August, reversing a downward trend that has been in place since April. At 5.2 per cent, the inflation rate is still well outside the 2-3 per cent band that the Reserve Bank of Australia aims for. Despite this, rates remained on hold this month.

The increase in inflation reminds us that we still have some way to go and that there is still potential for more rate rises. For now, market pricing for the peak continues to change from week to week, as does the timing of cuts.

Globally we are continuing to see rates on hold however there remain concerns around inflation remaining sticky. In the US, the Federal Reserve left interest rates on hold this month after inflation increased slightly but did warn that it would keep increasing if need be. Nevertheless, markets are expecting cuts to start towards the end of next year.

Surprisingly, UK inflation is coming down, despite stubbornly rising power prices. The Bank of England maintained rates, ending a run of 14 consecutive rate rises even though inflation remains a lot higher than other countries.

There are some exceptions where rate rises will continue at a rapid rate. Turkey’s inflation rate is now at 59 per cent with interest rates at 25 per cent after a failed attempt to solve inflation problems by cutting rates last year when inflation was rising rapidly. Argentina’s inflation is at 124 per cent and interest rates are at 118 per cent after the government resorted to printing money to try to provide economic support.

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