Federal Reserve chair Jerome Powell has signalled the Fed would be proceeding with a quarter-percentage point interest rate rise in two weeks.
And while the Reserve Bank of Australia has maintained a vow of patience, former RBA board member, Warwick McKibbin, believes it will inevitably have to follow the Fed’s lead.
“The RBA needs to communicate clearly why it is raising interest rates,” Mr McKibbin said.
“It will inevitably have to raise rates, but not by the same amount, once the US Fed starts to raise rates; otherwise, the depreciation of the $A [Australian dollar] would add to inflationary pressure,” the Australian National University professor said.
Last week, Mr Powell said he’s inclined to support a 25 basis point rate hike in two weeks’ time after US inflation hit a 40-year high.
“I do think it will be appropriate to raise our target range for the federal funds rate at the March meeting in a couple of weeks,” Mr Powell said.
While the situation in Australia is somewhat different, given inflation has remained well below that of peer countries, Mr McKibbin believes Australia is heading towards a significant inflationary impulse.
Reflecting on the major climate event taking place around the country at the moment, Mr McKibbin underscored the dangers of climate change-related inflation.
“I prefer the RBA did this rate increase in conjunction with significant energy and climate policy initiatives, including announcements of infrastructure spending for climate policy reasons; otherwise, there is a risk of an economic slowdown if monetary normalisation was implemented alone,” Mr McKibbin said.
Headline inflation hit 3.5 per cent in the December quarter, above the central bank’s 2 to 3 per cent target band.
