What do inflation and interest rates look like around the world? And what can Australia learn?

The Reserve Bank of Australia (RBA) has raised the official cash rate three times over the last quarter and market expectations indicate that this upward trend will continue. Examining other central banks' actions may provide insights into Australia’s future monetary policy decisions.

Australia’s interest rate is now 1.35%, its highest point in three years. Deutsche Bank chief economist for Australia Phil O’Donaghoe expects it to jump by 75-basis points in August and to reach 3.1% by the end of the year. However, this prediction is at odds with forecasting from the big four banks and previous statements by RBA Governor Philip Lowe.

The table below shows the current interest rate and inflation rate for 15 countries. The data also illustrates the adjustment from the previous reporting period.

Figures are accurate as of writing and data has been sourced from Trading Economics.

The Bank of Canada (BoC) raised interest rates this month by a full percentage point, surprising markets and economists which had forecast a 75-basis point hike. This is the largest rate rise Canadians have seen in almost a quarter of a century, stoking sentiment that other central banks will follow in their footsteps.

The United States, Singapore and Mexico all raised interest rates by at least 75-basis points over the last reporting period, while Japan, China, Indonesia and the Euro Area remained idle.

The Bank of England (BoE) only raised rates by 25-basis points but during an interview earlier this month with BBC Radio 4’s Today program deputy governor Jon Cunliffe conceded that it will do “whatever is necessary” and “will act forcefully” to combat rising inflation. 

The only nation listed above to institute a decrease in interest rates from the previous period was Russia, trimming one and a half percentage points month-on-month. The country’s inflation rate also declined by a significant amount.

Inflammatory economic pressures

Central banks raise interest rates to make borrowing more costly, compelling consumers to reduce their rate of spending and, in turn, diminish inflationary pressures on the economy.

However, inflation is surging globally on the back of accelerating energy costs as a result of the ongoing Russia-Ukraine conflict, as well as supply chain issues stemming from the impact of the recent global pandemic.

Recent statistics revealed that record-level fuel prices, higher construction costs raising the amount for new dwellings, and costlier groceries were the most prominent influencers of higher inflation in Australia.

These substantial, uncoordinated rate hikes have raised serious concerns among experts that central banks risk plunging world economies into a deep recession, not dissimilar to the early years of the 1980s.

University of California Berkeley economics professor Maurice Obstfeld recently told the ABC's The Business program that central banks have likely waited too long to boost interest rates and are now behind the curve, attempting to play catch up. He suggests that these monetary policies will place greater fiscal pressure on poorer, developing economies in the months and years ahead.

"If you're in the UK, and you know that Europe is tightening and the US is tightening, and Canada and Australia are tightening, and the range of developing economies are tightening, you sort of say, well you could go a little easier because the spillover effects are going to be powerful, and maybe we shouldn't go that far," Professor Obstfeld said.

Australia’s big four banks have all cast their predictions for the next few years of cash rate movements, anticipating significant rises. This may force home loan rates to rise between 2-4% over the next two years. RateCity has crunched the numbers on how these rate hikes could impact loans.

There is one important factor that may slow interest rate hikes in Australia, according to CommBank: the acceleration of property price falls and the negative impact this may have on the economy.

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