The Australian dollar has risen to its highest value in eight months. This comes after US Federal Reserve chair, Janet Yellen, said that she backed a gradual rise in the US interest rate. Despite this, the Australian Reserve Bank (RBA) has kept the official cash rate on hold for yet another month as they look to give themselves greater flexibility should they need it in the future.
During 2016, the Australian dollar gained 5% in value against the US dollar (USD). Trading reached a high of USD76.70 during March. While much debate has been entered into over whether or not this would be enough for the RBA to cut rates, the verdict has been a resounding ‘no’ to any change.
RBA Governor, Glenn Stevens, suggests that the dollar has run ‘a bit ahead of itself’ and the general consensus amongst board members is that they’d like to see the Aussie sit lower.
A lower Australian dollar allows the Australian economy to transition from being driven by mining to non-mining orientated growth. Levelling at USD70 cents, it seems that the RBA is comfortable with the Australian dollar sitting at around USD75 cents, whereas during 2013-14 the Aussie hovered around USD90 cents.
The RBA’s greatest concern is maintaining a core inflation rate of 2-3% as this facilitates the most favourable level of economic growth. An inflation rate that’s too high or too low usually indicates that the cash rate needs to be adjusted. Australia is currently sitting at a 1.7% rate of inflation. So there’s no real pressure here to move rates.
The Reserve Bank of New Zealand has reduced its cash rate five times since April 2015. Rates in Japan, Europe, and Sweden, along with Denmark and Switzerland have been cut to zero or pushed into negative amounts. But, the US, who currently has a cash rate of 0.50%, is considering a move up. Britain and Canada also have cash rates of 0.50%.
However, while there has been a talk of interest rate hikes in the US, there has been no mention of when. The US Fed has also instigated that they will proceed with caution, if they decide to raise rates, this is due to foreign economic growth weakening.
The Australian housing market is the main reason why the RBA is stalling on any rate move, as they do not want to add fuel to an already smouldering property market fire. So far they’ve managed to contain any blaze, but if they lower the cash rate, then they could add more heat to Australian home prices. Plus, by leaving rates on hold, the RBA gives itself greater flexibility just in case the Australian economy worsens.
For home buyers and sellers, low-interest rates are favourable as they support housing demand and can lead to opportunity. While Sydney and Melbourne property markets have reportedly slowed from record highs, these and most other Australian capitals are recording price growth in property.
On a final note, while the RBA is holding for now, if the Aussie dollar moves higher then they may be forced to make a move. Economists are suggesting that this move should take place within the next three months, as a depreciating currency typically stimulates low inflation and boosts economic activity.
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