Federal Reserve Uplifts Interest Rate – What This Means For Australia?

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Australian Economy, Macro Economics

The market is under focus with the US Federal Reserve raising the interest rate to 1.75 per cent, and this has given a laggard to RBA’s cash rate of 1.5 per cent. This move under new chairman Jerome Powell, comes for the first time in about 18 years and has led the US rates sit above Australian rates. While the signs of more number of interest rate hikes are emerging at the US, RBA stance to maintain the interest rate in the near-term stays as is.

Overall, the US interest rate hike has raised some concerns among investors, and as a result, S&P/ASX 200 index was slipping to low levels with banks under some pressure while raw materials’ prices boosted the commodity/ mining sector. Gold also paced up while US dollar dropped despite the strong outlook for the economy flagged by the Fed.

It is worth noting that the Federal Reserve has kept its median forecast for the funds target at 2.1 per cent for 2018 but enhanced the median forecast for 2019 to 2.9 per cent from 2.7 per cent, with a further increase to 3.4 per cent from 3.1 per cent for 2020.

Now the needles are turning to what Federal Reserve has in plan when it comes to more interest rate hikes in the coming period.

This entire scenario led the Australian dollar move up to US77.82 but soon it took a back seat and slid to US77.75 after the release of the employment data where jobless rate has been reported to be 5.6 per cent against the consensus expectation of 5.5 per cent. The addition of jobs (17,500 jobs) in the month of February was also lower than expected.

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Labour Data Trend (Source: Australian Bureau of Statistics)

While RBA is keen on seeing a weaker currency in view of inflation scenario, the current set of events are showcasing another picture.

Though Australia might not be in a hurry to follow Fed, but there is a chance that the banks may increase rates in line with the US Federal Reserve in the medium to long term, independent of RBA. Amidst this, gold stocks like Resolute Mining jumped up about 1.7%; while Lithium miners, Orocobre and Mineral Resources zoomed up by 3.3% and 4.04%, respectively.


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