The interest Rate and Inflation Tug-of-War - Helen Tarrant (1)

1
The interest Rate and Inflation Tug-of-War

• Welcome to our latest market outlook written by
  our financial partner at Elite Wealth
  Management.
• Their in-depth analysis and insights into the
  interest rate and inflation tug-of-war are
  incredibly informative, making it a must-read for
  both seasoned investors and those new to the
  world of finance.
• At Unikorn, we believe in making commercial
  property training in Australia easy and
  accessible for everyone. Thats why were here to
  answer any questions you may have.
• So, if you have any questions or need further
  clarification on any of the topics covered in
  this article, please feel free to reach out to us
  at helen_at_unikorn.com.au.
• Were excited to share this informative article
  with you, and we hope you find it valuable as
  you navigate the complex world of finance.
• Inflation Expectations
• Inflation expectations have largely remained
  anchored
• Inflation expectations have largely remained
  anchored especially those that look out over
  longer periods. Should this change, central banks
  will increase the urgency of their tightening
  process.
• Central Bank Credibility
• Central banks have built up credibility regrading
  their resolve and ability to keep inflation at
  target rates (i.e. the efforts to bring down
  inflation and maintain it around 2 for the past
  30 years). The credibility gained has helped
  inflation remain anchored (see above) but is
  also the key reason why the likelihood of central
  banks changing their inflation targets in the
  middle of a high inflation environment remains
  low for now (as doing so could hurt their
  credibility to address inflation in future).
  commercial real estate advisor in australia
• Market Outlook

2

• Our recession probability model, which captures
  three key leading indicators of recession
  including the slope of the yield curve, equity
  market returns and leading economic indicators,
  is currently around 40, suggesting that the
  chances of recession are material in 2023.
• Despite these warning signals, Australia has a
  better chance than most advance economies to
  avoid recession. This is due to several factors.
• Australia being a net exporter of commodities and
  stands to benefit from surging commodity prices.
• As China relaxes zero Covid policy, Chinese
  activity will rebound, supporting Australian
  exports.
• Inflation has not reached the same levels as
  other advanced economies so
• interest rates may not need to rise as far.
• Wage growth remains modest in Australia (3.1 in
  September). Trade unions have failed to
  negotiate large wage increases for workers under
  enterprise bargaining agreements (which accounts
  for 40 of workers) so a wage inflation spiral
  is less likely.
• Given that inflation is still well above target,
  we expect the RBA to continue
• raising interest rates to around 4.35. We
  forecast inflation to peak at around 8 in
  coming months and fall back to 4.5 by the end of
  2023.
• Will there be rate cuts in 2023?
• 2023 will be a challenging year for the RBA, who
  will face a difficult trade-off between
  dampening inflation and averting recession. If
  the economy does fall into a recession the RBA
  may feel compelled to cut interest rates. Indeed,
  when we look back at recessions over the past 50
  years, we observe that the RBA cut rates in every
  single recession (see below). Although they
  quickly raised rates during the recessions of
  1975, 1977 and
• 1981-83, given inflation was at or above 10. The
  key lesson we believe that the RBA took from
  these experiences is that cutting rates during
  recessions leads to even higher inflation, and
  an even longer battle to bring inflation back
  down.