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Unorthodox Trump may mean rate normality

AAP logoAAP 10/11/2016 Colin Brinsden, AAP Economics Correspondent

It's taken seven long years of central banks around the world taking unorthodox measures to keep the global economy afloat in the wake of the biggest financial crisis since the Great Depression.

Could it be that it will take an unorthodox US president to lead the way to some normality in interest rate structures both in the US and the rest of the planet?

"While it's only day one, it does look like a circuit breaker ... to the story that's given us low interest rates," Commonwealth Bank chief economist Michael Blythe told AAP.

Economists and analysts have scrambled to make some sense of the mayhem on financial markets when it became clear Republican Donald Trump was unexpectedly about to become the 45th US president.

Like global shares, interest rate-sensitive markets such as government bonds have been on a rollercoaster ride in what one analyst described as "breathtaking".

The view prior to the election was a Trump win would delay a much-anticipated interest rate hike by the US Federal Reserve in December because of the uncertainty it would bring.

But the reality of the Republican's win has market participants expecting quite the reverse.

Financial markets saw the prospect of a Fed hike in December falling to below 50 per cent on Wednesday but it is now at more than 80 per cent.

IG Research chief market strategist Chris Weston explains the president-elect's promises - such as corporate tax cuts, a sizeable infrastructure spend (anywhere between $US500 million ($A653 million) and $US2 trillion) and trade barriers - has traders believing this will result in an inflation increase.

"Trump will borrow and build, and that is what he has done his whole life and it's what he will do as president of the United States, " Mr Weston said.

In this case, the US Fed will have to be more aggressive in tightening monetary policy in 2017.

Australian markets have also become less enthused about the possibility of the Reserve Bank needing to cut the cash rate again, as a resulting strong US dollar and a weaker Australian dollar would add to inflation pressures here.

Mr Blythe still has an interest rate cut pencilled in for May, but admits it is looking less and less likely.

However, assuming a President Trump does slap tariffs on imports from China, the Asian giant isn't about to shut down the factories that have been producing goods to send to the US.

It would mean China would have to start looking for other markets to sell its wares to and this re-direction would put downward pressure on prices.

"If its a negative for China growth, then obviously that will impact on commodity prices," Mr Blythe said.

This would be bad for Australia and why he's reluctant to call it a day on an even lower Reserve Bank cash rate just yet.

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