The Australian dollar finished the previous week off strongly against its US counterpart sitting at a 2 year high US8055c, which is making the RBA sit up and take notice, and if the currency goes much higher they may have no choice but to act.
In their latest interest rate decision on Tuesday, the RBA kept rates on hold at 1.5 percent which had been widely anticipated by the market so all ears were on the following statement from RBA governor Philip Lowe.
“The recent data have been consistent with the bank’s expectation that growth in the Australian economy will gradually pick up over the coming year,” Mr Lowe noted in his following monetary speech.
It seems as if the central bank governor is deluding himself because if we look at the statistics, inflation in Australia is currently running at 1.8 percent which is below the central bank’s target rate and a mile away from the upper level of the target inflation level of 3 percent.
At such levels, the Aussie dollar is beginning to have a detrimental effect on the export industry with further damage likely should the currency push any higher.
“Housing prices have been rising briskly in some markets, although there are signs that conditions are easing, especially in Sydney,” Mr Lowe also noted.
At least there was a bit of honesty here, the housing market in Australia is definitely cooling off which is good for the RBA because instead of lifting interest rates, they may, in fact, be able to cut them since the rise of the property market is not such a concern now.
With the Aussie dollar at such a high level supported by better than average interest rates in Australia compared to the rest of the world, as well as surging commodity prices the RBA needs to act.
Whichever way you look at it the only way the RBA is going to stop the rise of the Australian dollar is by cutting interest rates, which just may help push inflation into their target range and help bring the Australia dollar back down to a comfortable level.
This article was written by FIBO Group analyst Andrew Masters.