There is a kind of sickness in Australia’s coverage and discussion about the economy – an obsession that interest rates need to do something. Go up, go down – anything! Unemployment fell, interest rates must do something (apparently fewer people being out of a job is bad and needs to be cured). Oh no, inflation went up in one month – we need interest rates to do something!!

We see this as well with investors – or let’s be honest, speculators – who are determined that interest rates will go up next week.

Even before the December CPI figures were released, investors were betting (and that is all it is) that there was a 58% chance the Reserve Bank of Australia would increase rates on 3 February:

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After the figures were released, showing inflation rose from 3.4% in November to 3.8% in December, the market moved to price in the chances of a rate rise at closer to two chances in three.

The Australian dollar also had a bit of a bump. This is because international investors who think rates will go up need to buy Australian dollars in order to buy Australian bonds and other financial instruments........

© The Guardian