Last week marked the dawn of a new political quadrennial in the United States and the return of president Donald Trump to the helm of the largest economy in the western world.
The reinstatement of the convicted criminal to the White House leaves many Australians questioning the reaction of international markets and how far the ripples of US politics will really be felt.
Australia is finally starting to make progress in the battle against high inflation with the immediate post-COVID period seeing mortgage holders contend with the highest interest rates in over 12 years to try and stem inflationary effects.
While the Reserve Bank of Australia (RBA) is yet to respond with much-desired cuts to rates, governor Michele Bullock has insisted it will not be swayed by patterns in any similar economies, including the US.
Speaking in the senate on Wednesday, RBA assistant governor Christopher Kent said higher US deficits through tax cuts in the nation are likely in prospect off the back of the Republican victory.
“One of the things that means is probably higher long-term interest rates in the US, higher inflation in the US, and quite possibly high growth for a time,” he said. “The other thing that is in prospect is tariffs but we just don’t know how big and who they will be applied to.”
RBA assistant governor Christopher Kent (left) has spoken in the Senate about what the bank anticipates from the new US government. Picture: realestate.com.au
Mr Kent also said the central bank was expecting rates to be affected on an international scale.
“Because the US is such an important source of funding and the demand by the US government for borrowing is substantial, that will have upwards effects on global interest rates,” he explained. “It’s also pushing the US dollar up and other currencies down.”
What does this actually mean on the ground on the other side of the world for Australians though? While we are a long way from the US, exchange rates are key within Australia’s economy thanks to how they influence financial flows and trade with other nations.
In its most recent statement on monetary policy earlier in the week, the RBA said it was grappling with “a high level of uncertainty about the outlook abroad”.
Goods and services trade between Australia and the US has more than tripled since the establishment of the free trade agreement almost 20 years ago, propelling the nation to our third-largest partner.
REA Group senior economist Anne Flaherty says it is too early to make a call on what Trump’s presidency could mean for Australians. Picture: Supplied
Higher interest rates are historically attractive when it comes to foreign investment, which in turn increases the demand for the home country’s currency, as well as bolstering its value.
The RBA acknowledges most central banks have now eased monetary policy as they become more confident that inflation is moving in the right direction. Domestically however, the bank said it would be “sufficiently restrictive” under core inflation is back in target.
REA Group senior economist Anne Flaherty agreed with the RBA’s estimation that the new Republican government would lead to higher inflation for the US, but added it was “unlikely to have any near-term impacts on Australia’s mortgage holders”.
“Higher inflation in the US could keep the federal fund rate higher but whether this has a flow on effect to Australia is hard to predict at this stage,” she said. “It is mainly speculation.”
Source: realestate.com.au
