Australian Rate Rise Looms as Gold Bounces From Support

Australian households could be facing another interest rate rise before the end of the month, with the Reserve Bank preparing to make its next monetary policy decision on 29 September.

Pressure increased this week after the US Federal Reserve raised interest rates by 0.25 percentage points, taking its target range to 3.75–4.00%. The reason was familiar to Australians: inflation remains too high, forcing central banks to keep monetary policy tighter for longer.

Australia is dealing with much the same problem. The RBA cash rate is already sitting at 4.35% following three increases this year, yet inflation remains above the Bank’s 2–3% target range. Higher global energy prices are adding another complication, particularly as expensive oil eventually works its way through Australian petrol prices, freight, manufacturing and other everyday costs.

Expectations of another Australian increase have consequently risen ahead of 29 September. A further 0.25 percentage point move would take the cash rate to 4.60%, placing another layer of pressure on mortgage holders already absorbing significantly higher repayments.

For perspective, another 0.25% increase would add roughly $100 a month to repayments on a $600,000, 25-year variable mortgage, depending on the individual loan and interest rate. It may not sound enormous in isolation, but after repeated increases it adds to an increasingly large amount being removed from household budgets.

The difficulty for the RBA is that higher interest rates cannot directly produce more oil, reduce international energy prices or fix global supply disruptions. Instead, higher rates work primarily by reducing borrowing and spending within Australia, meaning households and businesses carry much of the burden of slowing inflation even when some of that inflation is being generated overseas.

The US moving rates higher adds further weight to the issue because interest rate differences influence currencies, bond markets and global capital flows. Persistent inflation across several major economies also makes it increasingly difficult for central banks to begin talking seriously about rate cuts.

Interestingly, gold has responded to this environment by bouncing higher after recently falling towards its 50-day moving average. Rather than breaking decisively below this important technical level, buyers returned and gold moved higher, providing some encouragement that its broader upwards trend may still have support.

The 50-day moving average represents roughly ten weeks of trading and is commonly watched as an indication of shorter-term momentum. Gold bouncing from this level suggests it is currently acting as support, although the next few sessions will be important in determining whether that bounce develops into another sustained move higher.

Higher interest rates would normally create some pressure for gold because cash and government bonds become more attractive as their yields increase. However, the reason rates are rising matters. Persistent inflation, expensive energy, government debt and broader economic uncertainty can simultaneously increase interest in assets traditionally used as stores of value.

That leaves Australia heading towards an interesting end to September. Mortgage holders are preparing for another potentially painful RBA decision, inflation remains stubborn and gold has just bounced from one of its more closely watched technical support levels.