Rising $A won’t trigger rate cut

04_Rising Dollar-A wont trigger rate cut

By Marty Silk
(Australian Associated Press)

The Australian dollar’s renewed surge to eight month highs is unlikely to trigger an interest rate cut, an economist says.

The local currency rose back above 76 US cents early on Wednesday after US Federal Reserve chair Janet Yellen indicated interest rates in the world’s largest economy are likely to be raised only gradually, amid global economic uncertainty.

Commonwealth Bank of Australia chief economist Michael Blythe doubts the strong Aussie dollar will prompt the Reserve Bank of Australia to cut rates.

He says the RBA would prefer to hold rates at their current record low of 2.0 per cent given economic growth prospects remain strong.

“RBA commentary has sounded generally positive on the domestic leg of the growth equation,” Mr Blythe said.

“The standard refrain is that the non-mining economy strengthened in 2015 and prospects for continued growth are reasonable.

“The RBA was surprised at the pace of economic growth at the end of 2015. And they have progressively backed away from projections showing a rising unemployment rate.”

The local economy may also have a higher than expected pain threshold to a stronger currency.

Traditionally, a high dollar hurts local exporters, but Mr Blythe said there was a spike in the number of exporting companies in 2013/14 when the dollar averaged 92 US cents.

“The export response suggests the AUD was not as big a restraint on the economy that policy makers feared,” he said.

But even if the currency were to impact on the growth outlook, the RBA would be reluctant to take on major central banks by using policy to weaken the dollar, Mr Blythe said.

“The outcomes achieved by smaller central banks have proved disappointing,” he said.

“The NZD, for example, is yet to retest 2015 lows despite three rate cuts from the RBNZ and expectations of more to come.”

Either way, the RBA would be seeing the dollar’s recent rise as temporary, Mr Blythe said.

Potential upside for the US dollar includes an increasing likeliness of US Federal Reserve rate rises before 2017, and intensifying monetary policy divergence between the world’s major central banks this year.

“They should expect the USD to retrace some of its recent losses,” Mr Blythe said.


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