Soaring costs for energy, food and housing have forced more rate hikes around the world.
The United States Federal Reserve set the tone for major global economies this week when it once again raised interest rates to try and combat inflation. Wednesday’s rise of half a percentage point was the seventh increase this year in the US.
The Bank of England then echoed the economic tactic today by raising its main lending rate by a half-point.
It’s the highest interest rate Australians have faced since 2012.
How do interest rates change inflation?
Raising interest rates is used to try and lower inflation rates, which are a major concern for regular people living through a cost of living crisis.
The basic principle is when interest rates are lower, as was the case in Australia until May of this year, people are inclined to spend more cash.
This can lead to retailers pushing up the prices of goods and services.
If interest rates are high, people are generally less willing to spend their hard-earned savings.
The theory is that if interest rates are higher, it should cause the prices of goods to come down.
Rate rises are an economic tool that have been used to manage inflation in the past, however there are many other factors that also impact inflation such as underlying costs and supply.
Another issue at play is higher interest rates can potentially slow a nation’s economic growth due to the higher cost of lending money.
What world regulators are saying about inflation
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But they say there has been some promising signs that will help consumers ravaged by price spikes in everything from their power bills to grocery costs.
“We have made progress over the course of the last few months, but we have more ground to cover, and we have longer to go, and we are in for a long game,” ECB President Christine Lagarde said at a news conference.
“We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our two per cent medium-term target.”
Fed Chair Jerome Powell similarly warned there is “a long way to go” to control US inflation.
In Australia, RBA Governor Philip Lowe said inflation was still high despite multiple consecutive rate rises.
This afternoon the central bank decided to lift the cash rate target by 25 basis points or 0.25 per cent to 3.10 per cent. (Nine)
“Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role,” Lowe said.
“Returning inflation to target requires a more sustainable balance between demand and supply.”
“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.
“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
