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High Australian dollar likely to hold off RBA rate rise

Property investors and homeowners are likely to be spared interest rate rises until later this year due to the continued strength in the Australian dollar.

Economists suggest that the high Aussie is keeping inflation under control, which could stay the hand of the Reserve Bank as it considers monetary.

The March-quarter rate rise that had been previously been predicted by the Commonwealth Bank was now unlikely until the second half of the year according to economist Savanth Sebastian reported in The Age

”For the average household, a stronger Aussie could certainly be looked at as a friend rather than a foe,” he said. ”If it is keeping inflation low for longer, the Reserve Bank won’t have to raise rates as well.”

The Aussie has gained more than US20¢ since June, riding on the global resources boom and high local interest rates.

In November it hit $US1 as investors were attracted by Australia’s economic strength and the commodities boom fuelled by Asian demand.

On New Year’s Day it reached a fresh high of $US1.0256 and closed yesterday at $US1.0206, levels not seen since it was floated in 1983.

Mr Sebastian said the Aussie was expected to keep surging against the greenback until the end of the March quarter, possibly peaking at $US1.03.

He said it would start falling as the US and global recovery gained traction towards the end of the year.

”There will be talk of rate hikes in the US and the US dollar will start to strengthen.

”We’re not expecting rate hikes in the US until the end of 2011, early 2012. But it still adds to the perception that the US economy is recovering, and that effectively is going to drive the Aussie back.”

The high Aussie has helped offset oil price rises, shaving up to 30¢ a litre off the price of unleaded fuel. It has also discounted imported consumer goods.

But Mr Sebastian said its continued growth was hurting manufacturing, exports and inbound tourism.

”It is acting, I guess to some extent, like a quasi rate hike in terms of the impact it is having on those sectors of the economy,” he said. ”The Reserve Bank is aware of that and the big story will come when the Aussie comes off the boil. That’s really when the inflation story is going to hit, with wage growth as well.

”I think we’ll see that really towards the end of this year and the start of next year.”

Source: The Age 



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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