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How much higher do rates need to cut to kill inflation?



Australia’s economy has been rocked by inflationary pressures in recent years, prompting the Reserve Bank of Australia (RBA) to implement a series of interest rate hikes.

The latest interest rate hike, the 12th since April 2022, has raised the official cash rate target by 25 basis points from 3.85% to 4.10%. This move is aimed at curbing the stubbornly high rate of inflation and bringing it back within the RBA’s target range.

Former RBA Governor, Philip Lowe, has stated that the cost of living in Australia remains high, and it will take some time for inflation to return to the target range.

Meanwhile, the Fair Work Commission (FWC) has announced an increase in the National Minimum Wage to $882.80 per week or $23.23 per hour. This is an increase of 5.75%, just below the rate of inflation, which currently stands at 7%.

The relationship between the FWC’s decision to increase the minimum wage and its potential impact on inflation control measures implemented by the RBA has raised concerns in the market.

Some argue that the two entities are at odds. While the minimum wage is an essential policy tool to address income inequality and ensure fair compensation for low-wage workers, its influence on the broader economy, especially its relationship to inflation control measures such as interest rate adjustments, is a topic of ongoing debate.

It is true that an increase in the minimum wage can lead to higher consumer purchasing power and increased aggregate demand, which may fuel inflationary pressures.

This could increase labour costs for businesses, resulting in higher production costs and ultimately higher prices for goods and services, potentially exacerbating inflationary pressures.

This can trigger a wage-price spiral, where Australian workers demand further wage increases to maintain their purchasing power, leading to a cycle of rising prices and wages.

The RBA typically utilises interest rate adjustments as a primary tool to control inflation.

However, increasing the minimum wage may complicate the effectiveness of these measures due to the potential impacts on inflation expectations and wage dynamics.

If expectations of future inflation rise, interest rate measures may need to be adjusted more aggressively to maintain price stability.

However, if minimum wage hikes alter wage-price dynamics disproportionately to productivity, inflationary pressures may persist, requiring even more robust interest rate measures.

Some studies suggest that minimum wage hikes can lead to short-term increases in inflation, but these effects are often transitory and dissipate over time as other economic forces come into play.

Therefore, the long-term impact on interest rate measures to curb inflation appears to be limited. Other factors such as productivity growth, fiscal policies, and global economic conditions have more significant influences on Australia’s inflation dynamics.

The federal government who advocated for a pay increase for Australia’s lowest-paid workers should consider the broader macroeconomic context when evaluating the impact of minimum wage increases on inflation and interest rate measures.

Historically, there have been instances where increasing minimum wages have coincided with periods of inflation. However, while the minimum wage hike may have both direct and indirect effects on inflation dynamics, the long-term impact on interest rate measures to curb inflation some see as limited, whilst others warn it could tip Australia into recession.

Whatever the opinion it is clear that policymakers must adopt a comprehensive approach that considers the multifaceted drivers of inflation whilst protecting Australia’s most economically vulnerable, when formulating policies related to minimum wage adjustments.

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Moody’s downgrades China credit outlook, cites growth concerns



Moody’s Investors Service has downgraded China’s credit outlook, expressing concerns about the country’s economic growth prospects and the ongoing property market crisis.

The credit rating agency revised its outlook from stable to negative, citing a combination of factors that are putting pressure on China’s economy.

China’s economic growth has been slowing down in recent years, and Moody’s warns that this trend is expected to continue. The country faces challenges such as high debt levels, a rapidly aging population, and a declining labor force. These factors could hamper its ability to sustain robust economic growth in the future.

Additionally, the ongoing property market crisis in China is a major concern for Moody’s. The real estate sector has been a significant driver of the country’s economic growth, but it is currently experiencing a severe downturn with falling property prices and a growing number of unsold homes. This crisis has the potential to further weigh on China’s economic performance.

Moody’s decision to downgrade China’s credit outlook raises questions about the country’s ability to manage its economic challenges effectively. It also underscores the importance of addressing issues in the property market to prevent a broader economic crisis.

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Australia Post to shift to alternate-day mail delivery



In a move aimed at modernising its operations and accommodating the growing e-commerce industry, Australia Post has announced plans to reduce letter deliveries to every second day.

This significant shift is part of a broader strategy to expand its parcel business and adapt to changing consumer preferences.

Australia Post has recognized the declining demand for traditional letter services in an increasingly digital age. With more people communicating electronically and relying on email and messaging apps, the postal service has faced challenges in sustaining daily mail deliveries. By transitioning to alternate-day letter delivery, Australia Post aims to optimize its resources and focus on meeting the surging demand for parcel deliveries, driven by the booming online shopping market.

This strategic shift comes as a response to the changing landscape of postal services worldwide. Many postal agencies are diversifying their services to remain relevant and profitable. Australia Post’s move is expected to not only streamline its operations but also reduce costs associated with daily letter deliveries, ultimately benefiting both the organization and its customers.

While the change may be welcomed by those who prefer faster parcel deliveries, it raises questions about the impact on individuals and businesses reliant on daily mail services. Australia Post will need to address concerns regarding the potential delay of important correspondence and provide solutions to ensure minimal disruption for customers during this transition period.

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RBA maintains 4.35% rates as mortgage applications surge



The Reserve Bank of Australia (RBA) has decided to keep its official cash rate at 4.35%, citing concerns over the rapidly increasing number of mortgage applications.

This decision comes after several consecutive meetings where the RBA has refrained from adjusting interest rates.

The central bank’s decision to hold rates steady reflects their cautious approach to managing the current housing market boom. Mortgage applications have seen a significant surge in recent months, driven by record-low interest rates and increased demand for housing. While this has been a boon for the real estate industry, it has raised concerns about the potential for a housing bubble and financial stability.

Experts are divided on whether the RBA’s decision is the right course of action.

Some argue that maintaining low-interest rates is necessary to support economic recovery, especially in the wake of the COVID-19 pandemic. Others worry that the continued surge in mortgage applications without rate adjustments could lead to unsustainable levels of household debt.

In light of this decision, homeowners, prospective buyers, and investors will be closely watching the housing market’s trajectory and wondering how long the RBA can maintain its current stance.

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