Australian investors and home owners should be ready for a rocky ride if the United States' Federal Reserve raises interest rates, a Deakin University finance expert has warned.
Associate Professor Victor Fang, a finance researcher with the Deakin Business School, said the US Federal Reserve was expected to raise interest rates when it meets this week, a move that could prove painful for many Australians.
“As the US employment figures improve, this in turn may affect inflation. To curb US inflation, the Federal Reserve will have to increase the official rate,” Associate Professor Fang explained.
“In Australia this increase will be sorely felt by the stock market, home loan interest rates, and foreign investment.”
Associate Professor Fang said a rate increase would force a fall in the US stock market that will then cause a drop in the Australian market.
“The US stock market will fall as the cost of funds to buy stocks goes up which in turn will drag down our share market the following day,” he said.
“As for the Australian dollar, it will depreciate against the US dollar as investors will pull out their funds and may invest in the US as the interest rate differential becomes smaller.
“This is a concern for Australia, as there is a possibility that foreign investors will pull their investment from our country and invest in the US to take advantage of what will be seen as an improved economy.
“More capital flow into the US from Australia will in turn affect our business activity. Our share market will definitely be affected badly and the Australian dollar will fall.
“In this environment the Reserve Bank of Australia will not reduce our cash rate further, instead we could expect to see an increase in the cash rate in future.”
However it would not be all bad news, he said.
“Pensioners will be pleased to see a rate rise as this will improve their income,” Associate Professor Fang said. “Exporters are also likely to see gains as the Australian dollar falls.”
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