SHAREMARKETS in Australia and overseas have experienced volatile times in 2022.
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Recent trading sessions have seen sharp losses and suddenly there is fear of interest rate increases ahead.
Market interest rates bottomed almost a year ago after nearly 40 years of declines.
Longer-term loan rates have been creeping up since.
There has been talk of official central bank rate rises for several months and now some share investors have become alarmed and sought safety elsewhere.
Higher interest rates reduce consumers' spending power and increase costs for businesses.
For investors, they make fixed interest options look more attractive and shares in popular, highly priced growth companies appear too expensive.
The Reserve Bank has the responsibility of maintaining a high level of employment and a low level of inflation in Australia.
Its main means of doing this is by adjusting official interest rates.
When unemployment increases, wage demands and inflation reduce, and the RBA can cut rates.
When unemployment falls to low levels, labour shortages occur, wage demands increase, inflation increases, and the RBA raises interest rates.
The Bureau of Statistics reported unemployment fell to 4.2 per cent in December.
The RBA has indicated it will probably need to raise rates "when the unemployment rate starts with a 3".
This year, returns may be more modest and variable due to interest rate increases.
The RBA's official target range for inflation is 2 to 3 per cent.
The CPI measure of inflation was 3.5 per cent for the year ended December. Excluding volatile components, the figure was 2.7 per cent.
Inflation could remain elevated due to supply shortages and wage demands.
This indicates official rate rises must lie ahead. The question is when, and by how much.
The RBA says inflation is mostly temporary due to COVID-induced supply chain disruptions.
The RBA says it won't need to raise rates for quite a while yet, maybe not until 2024.
The financial markets disagree. Market traders expect and are betting on RBA rate rises later this year.
The RBA will also be watching home-owner debt due to the big jump in house prices.
Even modest interest rate increases will bring many mortgage defaults. The RBA doesn't want to crash the housing market.
Share investors have had a strong run for the last 10 years.
This year, returns may be more modest and variable due to interest rate increases.
However, the rate rises will be gradual, so shares should still perform satisfactorily.