US Interest Rate Hikes Could Worsen Inflation in Australia: Aussie Treasurer

Australian Treasurer Jim Chalmers gives his economic update at Parliament House in Canberra, Australia, on July 28, 2022. Martin Ollman/Getty Images

Australian Treasurer Jim Chalmers is concerned about a potential rise in the country’s inflation rate caused by the aggressive interest rate hikes in the United States.

Speaking to reporters before heading to Washington to attend the annual International Monetary Fund (IMF) meeting, the treasurer said the gap between the interest rates in the two countries could fan inflation in Australia.

“When there’s a big and widening gap between U.S. interest rates and Australia, which is putting downward pressure on our currency, that makes imports more expensive,” he said.

“And that has implications for inflation.”

Australia’s official cash rate currently stands at 2.6 percent after the Reserve Bank of Australia slowed down its interest rate hike cycle in October.

In comparison, the United States raised its interest rates by 0.75 percent to three percent in September, with Federal Reserve officials predicting the rates to peak at 4.6 percent in 2023.

Treasurer’s Concern Over Energy Prices

The treasure also expressed his concern over high energy prices due to their impact on inflation.

“One of the reasons why this inflation will hang around longer than we want it to is because there are expectations around these electricity price rises being more problematic for longer,” he said.

A general view of the Loy Yang power plants in Traralgon, Australia, on Aug. 17, 2022. Asanka Ratnayake/Getty Images

Jeff Dimery, CEO of Alinta Energy–one of Australia’s largest energy companies, has warned that electricity prices could soar by 35 percent in the next 12 months as the country is pursuing net-zero emissions.

Earlier this year, the Labor party promised to reduce electricity bills for each household by $275 (US$172) by 2025 if it won the federal election in May.

However, the Opposition has criticised the Labor government for “walking away” from its promise after it came into power.

Consumer Sentiment Sours in the Face of Interest Rate Hikes

On another topic, Chalmers said the global economy was facing the third significant recession in the past 15 years. However, he believed Australia’s economy could avoid a downturn.

“I’m optimistic about our economy, but first, we’re going to have to navigate what are increasingly difficult global conditions,” he said.

The treasurer’s positive outlook comes as Australian consumers are increasingly worried about the economy and their financial situations.

According to a joint survey by Westpac bank and the Melbourne Institute, consumer confidence fell to near-record lows in October, with the consumer sentiment index dropping 0.9 percent to 83.7 compared to the index score of 104.6 a year ago.

Another survey by ANZ and Roy Morgan also showed that consumer sentiment decreased by 1.1 percent in the week ending Oct. 9.

Furthermore, Commonwealth Bank’s housing spending intentions index, which is based on the bank’s payments data, loan application information and Google Trends data, dropped for the first time since April.

The index dipped by 0.5 percent to 114.9 in September, which suggested that the RBA’s aggressive tightening policy started to affect households’ spending habits.

The Commonwealth Bank expected further impacts to come in the upcoming months.