Is this a harbinger of a new interest rate shock?

At the beginning of this week, interest rates in Australia unexpectedly rose again and a few days later the same happened in Canada. The interest rate hikes are a signal that high inflation is far from under control.

For months it looked as if inflationary pressures were finally easing thanks to falling oil and natural gas prices. In the eyes of central banks in Australia and Canada, however, inflation is not falling fast enough. A week and a half ago it was announced that inflation in Australia had reached 6,8% in April. This increase was partly due to items whose prices fluctuate strongly, such as fruit and travel. But rising housing costs and especially the tightness on the labor market, among other things, indicate that inflation will linger more than the central bank would like to see. This prompted the Reserve Bank of Australia (RBA) to suddenly raise interest rates again by a quarter of a percentage point after three months as a surprise move.

The dollar and the dollar
In the currency world, that was good news for the dollar. The Australian dollar to be exact. Against the euro, the currency rose by almost 1,5% within a day, to the highest level since the beginning of April. A day later, the dollar rose to its highest level in nearly five months. This time it's about the Canadian dollar, which is also called the loonie. Shortly after the RBA, the Bank of Canada also unexpectedly raised interest rates by a quarter of a percentage point. And just like in Australia, that higher interest rate led to an inflow of international capital.

Countdown to June 14
The big question is what will happen next week with the dollar, or rather, the US dollar. On Wednesday 14 June, the Federal Reserve (Fed) will announce what will happen to the key interest rate in the United States. Inflation there is also hovering above 6%, while the labor market remains very tight. Initially, it looked as if the Fed – partly in view of the turmoil in the US banking sector – would opt to hold back for the time being in the hope that inflation will of its own accord move towards the target level of 2%. moves.

Inflation specter has not yet been dispelled
However, according to an economist poll on the CME exchange platform, the chance of a rate hike has shot up from less than 10% to almost 30% within a few weeks. If interest rates actually go up in the United States, it will have two important consequences. In the first place, there is a good chance that the US dollar – following the Australian and Canadian dollars – will receive a boost from slightly higher interest rates. But at least as important is that the financial world gets a clear message that the inflation ghost is far from back in the box for a long time.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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