Rate debate as RBA review paper lobs

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Overnight global volatility in the aftershock of higher-than-expected US inflation numbers will continue to fuel the local economic interest rate debate as Reserve Bank of Australia decision-making will be in focus.

With $60 billion wiped from the local stock market on Wednesday, all eyes were on global markets overnight following an international sell-off.

Wall Street regained ground after choppy trading overnight, with US stocks closing slightly higher.

Global markets had been gaining since late July on optimism inflation had peaked and central banks would back away from aggressive rate hikes.

The independent task force investigating the RBA is expected to release a summary paper on Thursday examining the parameters of interest rates.

Pradeep Philip, senior partner at Deloitte Access Economics, said the inflation figures had fueled expectations of higher interest rates in Europe and the United States.

Dr Philip said there were also fears of a recession in the United States.

“The RBA should always proceed on the basis of evidence of what is driving inflation in Australia,” Dr Philip told AAP.

“While our economy is showing signs of weakness, supported by government spending, terms of trade and households depleting their savings, there are signs of weakness that we need to address.”

Mardy Chiah, senior lecturer in finance at Swinburne University, said the possibility of further rate hikes in the United States spelled more bad news for Australia.

“It shows that inflation remains a difficult beast to tame and also points to further interest rate hikes in Australia,” he said.

“We can no longer be certain of these expectations that the cash rate will hit a ceiling of 3% by next year.”

RBA Governor Philip Lowe is scheduled to appear at a hearing of the House of Representatives Standing Committee on the Economy on Friday.

Monthly labor data from the Australian Bureau of Statistics will be released on Thursday.

With the labor market still very competitive, unemployment is expected to remain low.

Most expect the jobless rate to hold steady at 3.4%, already a 48-year low, although NAB economists see the jobless rate falling to 3.3%.

While employment unexpectedly fell by 41,000 jobs in July, most expect it to rebound and around 30,000 jobs to be added in August.

The jobs figures will inform the RBA’s October rate decision, with NAB economist Tapas Strickland expecting the central bank to start rising in smaller increments if the jobless rate holds steady .

“A larger drop in unemployment, say 3.2%, would indicate that the RBA needs to remain aggressive and add to the upside risks to wages,” he said.

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