Out of the box – interest rates under pressure as inflation hits 20-year high

Investment markets were facing turmoil today on higher-than-expected inflation figures that could mean higher mortage rates by next week, a technology sector sell-off in the US and threats from Russia to cut gas supplies to Poland and Bulgaria.

Apr 27, 2022, updated Apr 27, 2022
The intelliHR board has dropped its support for Humanforce (AAP Image/Joel Carrett)

The intelliHR board has dropped its support for Humanforce (AAP Image/Joel Carrett)

The ASX fell 81 points at this morning’s opening with EML Payments continuing to face heavy losses after it revealed problems in its European earnings.

Investors were also likely to be nervous about the release of Australian inflation figures this morning that could determine if there is an interest rate hike in May or a significantly bigger hike in June.

The Australian Bureau of Statistics reported inflation hit 5.1 per cent, higher than most economists anticipated. ANZ had tipped a rate of 4.7 per cent.

It was the biggest increase in more than 20 years and the highest since the introduction of the GST and that will put pressure on the Reserve Bank to act.

Significantly, much of the increase in inflation was in non-discretionary items which meant the increases hit almost everyone.

BetaShares chief economist David Bassenese said the higher-than-expected inflation rate would mean the Reserve Bank board would hike rates in May.

The last time the RBA hiked rates in an election campaign was when John Howard lost office.

IFM economist Alex Joiner said the data seemed to demand an immediate response from the RBA with the cash rate sitting at 0.1 per cent.

A possible outcome was an increase in the cash rate of 0.4 per cent at next weeks RBA board meeting. Other economists believe it could mean a 0.4 per cent increase in June.

The biggest contributors to inflation were housing costs and transport.

The US tech sell-off came as Google’s parent Alphabet Inc missed earnings expectations and faced a heavy selling in after-market trade. Tesla was down 12 per cent which took $US126 billion from its value as investors showed concern about Elon Musk’s takeover of Twitter.

The Nasdaq index dropped 4 per cent and closed at its lowest level since 2020. The Dow Jones index shed 2.4 per cent.

The ASX Futures were down heavily this morning indicating a fall of 1.5 per cent at the opening of the market.

BHP and Rio were also down on US markets overnight because of the slump in iron ore prices.

Russia’s threats to cut gas supplies follows its demands to make hostile countries pay for gas in roubles, something Poland and the rest of Europe has refused to do.

Poland said it had sufficient gas in storage to deal with the threat.



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