Forecast: BULLISH

The Reserve Bank of Australia has said that their forward looking indicators suggest the market should prepare for higher interest rates moving forward. Australia enjoyed strong employment data in 2017 and it is expected to continue in 2018. The labour market is continuing to put more people into work which will cause inflation pressures as spending increases in the economy.

As more people are employed across Australia forcing the unemployment rate to fall below 5%, the Philips curve theory on economic will kick into play. The Philips theory is a model all central banks use that states once unemployment falls below 5%, wages start to increase as business offer higher wages to compete for the best available talent in the market. With 95% of the economy in full time or part time employment, the remaining 5% will be fiercely contested for by business who want to get the best talent. This drives up wages, resulting in better take home pay for workers in the economy. As spending increases due to higher wages inflation start to rise from the increasing demand for goods and services. Businesses will also raise prices to offset the cost of paying higher wages, driving up inflation even higher, forcing the central bank to begin to hike interest rates when their indicators suggest inflation will start to overshoot their 2% further down the line.

It was forecasted that inflation will not reach its 2% target by 2019, this is due to a new model on how they measure inflation. Many investment banks have suggested a potential interest rate hike in 2018. Which is looking likely if employment continues to show strong numbers.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.