A sharp fall in the Australian dollar may provide a short-term boost to economic growth, but also risks re-igniting inflationary fears in the longer term, dealers say.
The Aussie dollar has slumped almost 20 percent since reaching a 25-year high of US$0.9849 in mid-July, when many economists predicted it would reach parity with the greenback for the first time since it was floated in 1983.
But falling commodity prices and Australia’s first interest rate cut in almost seven years this month saw the currency slip below US$0.80 for the first time in 13 months last week.
While it recovered slightly to close at US$0.8063 on Friday, market watchers said the currency was likely to fall further amid expectations that the Reserve Bank of Australia (RBA) would again cut rates to offset an economic slowdown.
“With commodity prices still falling, further interest rate cuts likely from the RBA ... further falls in the Australian dollar are likely over the next six months or so, with next stop being around 75 US cents,” AMP Capital Investors chief economist Shane Oliver said.
The declining currency is tipped to significantly impact on Australia’s trade sector.
“While this may provide a short-term boost to the economy via the terms of trade, it also creates upside risks to the outlook for tradeables inflation,” said Warren Hogan, ANZ Bank’s head of Australian economics and interest rate research.
He said a weaker currency would affect the terms of trade — the ratio of export to import prices — by making exports cheaper to overseas customers and imports more expensive for Australian consumers.
“This should be a positive for net exports and for overall GDP growth,” Hogan said.
The longer-term problem stems from what Hogan terms “tradeables inflation,” when the cost of living in Australia rises because of the higher prices consumers have to pay for imported goods.
The threat from rising inflation was the major reason the Reserve Bank hiked Australian interest rates to among the highest in the developed world before this month’s policy reversal in the face of slowing growth.
Any indications that inflationary pressures were on the rise were likely to make the central bank more cautious about further interest rate cuts, Hogan said.
The bank has predicted headline inflation will hit 5 percent next year, but says it is then likely to return to the official target rate of 2 percent to 3 percent if wage and demand growth remain moderate in the near term.
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