The Australian dollar soared to a 24-year high against the greenback yesterday after a spike in inflation re-ignited expectations interest rates could rise as early as next month.
The Australian dollar was trading at US$0.9505 at 5pm yesterday, up more than US$0.01 on Tuesday’s US$0.9404 and its highest level since 1984.
The rise came after a 1.3 percent surge in March quarter inflation surprised the market, taking the annual inflation rate to 4.2 percent, well up on the Reserve Bank of Australia’s (RBA) 2 percent to 3 percent target range.
Economists said the figure effectively ended any prospect the central bank would cut interest rates, instead increasing pressure for another hike.
Currency markets drove the local currency up to a high of US$0.9514, anticipating the interest differential between Australia and the US will increase, or at least remain stable. The Australian dollar’s highest level against the greenback since the currency was floated in 1983 was US$0.9653, reached on March 16, 1984.
Analysts say if the Australian dollar continues to rise, it could reach parity with the US dollar for the first time since mid-1982, when the currency was still pegged against a basket of currencies.
ANZ market strategist Patricia Gacis said there was widespread expectation that the next move in interest rates would be up, with many tipping a rise could come next month.
“Markets are now pricing somewhere around a 27 percent chance of a rate hike by May,” she said. “That’s a quite dramatic move.”
The central bank lifted rates to a 12-year high of 7.25 percent last month, but earlier this month expressed confidence that an annual rate of 4.0 percent in the March figures would mean inflation was under control in the medium term.
Gacis said the latest figures had put the Reserve Bank back on inflation alert, leaving it poised to lift rates.
“The causes of underlying inflation is clearly accelerating,” Gacis said. “There is now a growing chance that inflation has not reached its peak in Australia.”
“The RBA really have no room for any more upside surprises in inflation in the near term,” she said.
Treasurer Wayne Swan said inflation was unacceptably high and he would attempt to tackle the problem in his first budget, which will be handed down in Canberra on May 13.
“These inflation figures are a stark reminder of the price pressures hitting Australian families, they’re quite sobering,” he told reporters.
“And I think they demonstrate the pain that people are feeling around the kitchen table,” he said.
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