The American Influence on Australia’s Monetary Policy
The American Rescue Plan, a $1.9 trillion economic stimulus package signed by US President Joe Biden, is making waves not just in the United States but also down under. As Australia’s Reserve Bank of Australia (RBA) grapples with soaring inflation rates, experts are pondering the impact of Biden’s fiscal policy on the RBA’s monetary decisions.
The Stimulus Package and Inflation
The American Rescue Plan is a comprehensive package that includes direct payments to families, tax breaks, and small business funding. While it aims to boost the US economy, it’s also expected to increase the federal budget deficit, thereby exerting upward pressure on inflation rates globally.
RBA’s Stance on Inflation
The RBA has been cautious in its approach to rate hikes, especially when compared to the Federal Reserve in the US. As of July 2023, the RBA has kept its benchmark cash rate at 4.1%, despite having increased it 12 times since May last year. The goal? To bring down the inflation rate to a target range of 2% to 3%.
“Inflation could rise to around 4% in the coming months,” warned RBA Governor Philip Lowe in a recent speech. He also indicated that the RBA is prepared to act, stating, “if inflation continues to rise, the RBA will have no choice but to act,” echoing the sentiments of Mike Johnson, a senior economist at the Commonwealth Bank of Australia.
The Biden Effect
President Biden has been vocal about his commitment to fighting inflation. In a recent speech, Biden outlined steps his administration is taking to address the issue, including increasing the supply of goods and services and reducing the cost of prescription drugs.
Diverging Opinions
While some experts like Mike Johnson believe that the American Rescue Plan could force the RBA to act sooner, others like Patrick McHenry, a senior economist at ANZ Bank, think otherwise. “The RBA is more likely to be influenced by domestic economic factors, such as the labor market and wage growth,” McHenry stated.
Market Indicators and Implications
The 10-year Treasury yield, a key indicator of long-term inflation expectations, has been on the rise, currently sitting at around 2.8%, its highest level in over two years. This suggests that the market is increasingly concerned about inflation, aligning with the RBA’s cautious stance.
The Road Ahead
The RBA is navigating a complex economic landscape, marked by a strong labor market with low unemployment and rising wages, but also high inflation, currently at 5.6% as of May 2023. The bank’s decisions have far-reaching implications, affecting not just economic growth, inflation, and unemployment, but also the political landscape in Australia.
Final Thoughts
As the world watches the ripple effects of the American Rescue Plan, it’s clear that its influence extends beyond American shores. Whether or not it will be a determining factor in the RBA’s future decisions remains to be seen. But one thing is certain: the global interconnectedness of economic policies is more evident now than ever before.
