It came as no surprise that the RBA raised interest rates yesterday, but the size of the increase spoke louder than the rise itself. 

Up until now the RBA have been flip-flopping on their interest rate messaging, but yesterday’s 0.50% increase was a real statement of intent. The irony was that only 9 months ago they were saying they wouldn’t raise interest rates until 2024.

It’s been clear for a while that the RBA was more focussed on growth than inflation. Unfortunately this has left them far behind in the race to bring inflation back under control and within their 2%-3% inflation charter.

If inflation isn’t controlled it feeds on itself and leads to ever-spiralling costs and wage demands.

A tight-rope balancing act curbs inflation

So where to from here for interest rates in Australia? Obviously higher…but how high?

The RBA is going to have to perform a real tight-rope balancing act. If it raises interest rates too high it will torpedo growth and potentially put the economy into reverse. If it doesn’t raise them enough it won’t be able to snuff out inflation which will also eventually torpedo the economy.

In NZ the lowest that their official interest rate reached was 0.25% (similar to ours 0.10%), but they are now at 2.00% with their last 2 recent interest rates rises being 0.50% each.

While Australia and NZ share a lot of similarities including the recent explosive growth of their housing markets, Australia is different as it has one of the highest levels of private sector debt in the world.

This should limit how high our interest rates can go but we’re not there yet.

Let’s see