There is little hope of another interest rate cut in Australia after Donald Trump’s election as the US president. In fact, many economists are suggesting that the only move Australian interest rates will make will be up.
The Reserve Bank of Australia (RBA), have made four rate cuts over the last two years. These moves have lowered the Australian official cash rate to 1.5%. However, economists are saying that Trump’s proposed tax cuts and boosted infrastructure spending will strain other economies. As a direct result, global inflation will rise.
Although, not all economists agree. Some are suggesting that fears of a “Trump slump” in financial markets have no justification. No real changes in financial markets have occurred because of Trump’s election. But, if Trump does boost government spending and the US dollar strengthens, this may weaken the Aussie dollar. Thus, reducing the likelihood of the Reserve Bank cutting rates.
Mr Trump’s election creates economic uncertainty. Hence, it’s doubtful that any further rate cuts will occur. Chief economists are suggesting that Australian interest rates will stay on hold during 2017, then move in 2018. Heightening risk suggests that the move will be up, and not down.
New Zealand’s move to cut rates the morning after the US election was a surprise. But, it seems that none of New Zealand’s major banks have passed this cut on to lenders.
RBA governor Phillip Lowe has shown his concerns about the rise of protectionism globally. Trump is a fan of protectionism, and this may pose a threat to Australian export. Consequently, the RBA may have to cut rates, so the domestic economy gets a boost.
So, just what is protectionism? Let’s look at this in greater detail.
Simply put, protectionism is an economic policy that restricts trade by imposing tariffs on imported goods. These policies reduce the trade deficit and support employment levels in a sector, and cut globalisation.
President Trump favours protectionism. His whole approach rests on bringing back the simpler times of the 1950s and 1960s when nations flourished. These times also had high tariffs and trade barriers, which Trump wishes to reintroduce.
With protectionism locking out other countries, the US will rely on its resources. Therefore, other countries that now trade with the US, such as Mexico and poorer Asian countries like Malaysia and Indonesia will falter. Predictions are that Trump’s move to bring back protectionism will force these countries into recession.
Australia will weather this storm, mainly because our wages are higher than the US. As a result, we don’t represent a threat to local US business, so we represent a good trading partner. So, protectionism alone shouldn’t hurt your mortgage.
Although protectionism isn’t the only whammy Trump is looking to introduce, he also wants to cut taxes. Ronald Regan also cut taxes; he accumulated a massive deficit, and many feared US government bankruptcy. Nevertheless, economic failure never happened. Instead, the US dollar kept its stance. Still, this fuelled inflation and as a result this spread around the globe.
Expanding government debt increases the amount of money in the economy. Nonetheless, the level of goods and services available stays the same. So, the rules of supply and demand come into play. There is more money to spend, but not enough goods and service available, so prices rise. Subsequently, inflation rises too.
If US inflation rises, then interest must rise as well. This move will then protect the US dollar’s value and control inflation. Nevertheless, rises in US interest rates will force Australia to follow suit.
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