Loretta Mester, a US Federal Reserve board member and president of the Federal Reserve Bank of Cleveland, said she supports a rate increase at next week’s Federal Open Market Committee meeting. This rate increase could have a significant impact on Australian interest rates.

“I do believe the US economy can handle an interest-rate increase at this point,” Mester told The Business in an Australian exclusive. She said the board must move to ensure that inflation remains in check.   

“I don't think we’re on the brink of a big surge in inflation, but I do think if you continue to delay, as we continue to make progress on our goal, we could find ourselves in an uncomfortable situation,” she said.

Gathered data on the US economy, as well as those of the European, Japanese, and Chinese economies, have led Mester to believe that a rate hike is appropriate.

Markets previously felt an interest rate hike in May was more likely than one in March—that is until Federal Reserve chair Janet Yellen spoke last Friday and made it clear that rates will rise sooner rather than later. She further cautioned Australian borrowers to be prepared.

“Higher global rates mean higher wholesale funding and the Aussie banking sector needs more wholesale funding than other banking sectors in the world,” said George Boubouras, chief investment officer of Contango Asset Management Limited.

These increases will likely flow through to Aussie households, with banks increasing mortgage rates to compensate.

Most analysts believe the US Federal Reserve will raise rates several times this year as President Donald Trump is pushing policies that could ignite inflation.

On the other hand, Mester has labelled Trump’s goal of reaching 4% growth as unlikely. “My own view of it now is that potential growth is 2 per cent – some of my colleagues would have an even lower number than that,” she said.
 

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