What the first US interest hike since 2018 means for Aussies on variable rates
The US has been experiencing the country’s worst inflation in decades, with Atlanta seeing the highest rate in the country.
“I’ve never seen anything like it in my life,” said Heather Somerstein, a consultant who moved to Atlanta from New York City three years ago. “Prices jumped so high, so fast.”
In an interview with ABC News, Somerstein shared that she had moved to Atlanta in the hopes of a more affordable lifestyle. Now, she is thinking of moving again.
“If I decide to stay here, how much further are the prices going to go up?” she asked.
Despite the US Federal Reserve having hiked interest rates for the first time since 2018, the majority of the country’s mortgages remain on fixed rates for their duration. While American households rest easy, however, Australians with mortgages watch nervously to see where their rates might be heading.
The Reserve Bank doesn’t need to follow the Federal Reserve in hiking rates but often takes cues from it, former Federal Reserve Bank of Atlanta President Dennis Lockhart told ABC News.
“The more an economy is integrated in the global economy as an export economy, the more dependent it is on its exchange rate,” Lockhart said. “There tends to be some linkage between what the US does and what [Australia] or a smaller country might do.”
Variable mortgage rates are likely to rise regardless. Australian banks borrow money in offshore markets, which means that as interest rates rise around the world, so do borrowing costs.
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While the record-low interest rates brought on by COVID-19 helped support businesses globally, it also supported a sharp increase in asset prices around the world.
The ‘first sign of trouble’, ABC News reported, was the dramatic price increase of houses and rent in Atlanta. In 2021 alone, rent and house prices both increased by around 20%.
In Australia, residential property prices jumped by 23.7% in the past 12 months, while the stock market increased by 17.23%.
The war in Ukraine has only complicated matters, with the financial sanctions on Russia likely to feed even higher inflation and cause further interruptions to food and energy supply.
Read next: Ukraine war could spur early rate hike, RBA boss says
With the looming damage to global economic growth, Lockhart said he could not rule out the possibility of a ‘stagflation’.
“Stagflation was the result of a special set of circumstances that occurred in the 1970s and [were] very unusual … almost a worst-case situation, where you have price pressures and inflation at the same time as you’re in a recession,” he told ABC News.
“Today, I would say you cannot rule out those set of circumstances coming together.”
