Are banks doubting the US dollar?

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Carrington Clarke (0:37)

Is the era of US dollar dominance on its last legs? Against the backdrop of the war in Iran, the end of trade war with Canada, and bond market sell-offs, trust in the greenback appears to be weakening. And central banks around the world are looking elsewhere to shore up reserves. So how does this all play into rising interest rates here in Australia and across the world? Welcome to ABC Business Daily.

I'm Carrington Clarke.

Ian Verrender (1:06)

And I'm Ian Verrender, the ABC's Chief Business Correspondent.

Carrington Clarke (1:09)

Ian, the Reserve Bank Board begins its meetings today to decide whether or not to hike interest rates further. It's not often that markets seem to be universally in agreement on an issue, but on this occasion, it appears that everyone thinks that they have to hike interest rates.

The Reserve Bank kind of was ahead of other global central banks in this particular cycle of rate hiking. We've had three already this year, but we've seen obviously central banks around the world joining in that kind of stampede to higher interest rates. Take us through what is driving what we're seeing both here in Australia and around the world. Is this just about dealing with inflationary pressures that we know have once again reemerged?

Ian Verrender (1:55)

Yeah, Carrington. Look, interesting question. I mean, obviously there's some very domestic factors here that have been driving our inflation problem. I mean, Australia is the world's biggest importer of diesel. And of course, diesel prices have just gone ballistic this year with the war in Iran.

And as a result of that, we've seen prices across the country, you know, diesel just flows through into the price of almost everything. We're a big country, smallish population. We rely heavily on transport. We've got mining and agriculture industries that absolutely just can't do without diesel. And so the cost of diesel really does dictate inflationary pressures across the economy. We've also got a problem with productivity. So our productivity is low, and that means you don't need a lot of growth to fire up inflation. And we've had a, look, quite a benign unemployment problem. Our employment levels are quite strong still, even though they have been rising. And so all of those things combined mean that we've continued with the inflation issue that we thought was solved last year. And of course, that has put pressure on the Reserve Bank of Australia. The reason why, of course, that they hiked rates three times early this year. So we're looking like we're going to have another rate hike tomorrow. And that would make the fourth this year. And of course, that puts us at the forefront of most other developed nations. We've seen rate hikes in Europe, Japan, and most recently in America as well. And what's happened, I guess, in the past month or so, has been a bit of a revolt on, amongst money markets and bond markets in particular, that are driving interest rates across the globe higher. And as a result of that, there is no way that the Reserve Bank could not raise interest rates tomorrow.

You know, the yield on the 10-year Australian government bond is now 5.4%.

That's considered to be the Australian benchmark rate. And we've got an official rate at the Reserve Bank, which is way below that. And of course, even more pronounced and more importantly, the US 10-year bond rate has now risen well above 5%.

It's now 5.2%.

That's its highest level in more than 20 years. And that US government bond rate is the benchmark that drives global interest rates. It is the absolute, it's what's known as the risk-free rate. So when you get a big spike in US government interest rates, as we've seen just in the past few weeks, that flows through to the rest of the world. And so at the moment, rather than central banks driving monetary policy, we have money markets forcing central banks to basically follow the lead. Usually you've got money markets that are basically captive to whatever central banks do. They either follow what central banks do in rate movements, or they try and anticipate what's going on with central banks. Right now, they're forcing central banks to raise interest rates.