I don’t think the RBA has taken enough consideration of the international implications of this rate rise.
We are a trillion US dollar economy compared with the US 14 trillion USD economy and the USD 60 trillion world economy. Our country is only a speck internationally, traditionally only 2% of turnover for global giants like Nestle, Unilever & Shell. However, our interest rates are internationally high by comparison. So where is a lot of hot money going to flow, if not into the AUD? If the RBA continues along this path whilst the huge US economy keeps deflating and the USD keeps falling, our currency will reach parity with the USD in very short order.
This could be fatal for our exports, especially in the manufacturing sector which will become uncompetitive with imports if they haven’t already become so.
Since I recently predicted, wrongly as it turns out, that US rates would rise before Australia’s, the US economy has continued to weaken. Unemployment has risen to 9.8%. President Obama’s health care reform is stalled, Afghanistan is a quagmire, Chicago lost the 2016 Olympics to Rio, gold continues to break records (because those in the know have lost faith in the USD).
So, whilst US interest may not have risen for domestic reasons, investors will vote with their feet and search for a currency that is rising.
What better place to put their money than in Australia, which is politically stable, supplies the world with resources and now has one of the highest interest rates in the world (but lower than India and Brazil), and a rising dollar.
The upward pressure on the AUD will rise each time the RBA ratchets up the cash rate. Inevitably more money will flow into the AUD pushing it rapidly towards 1AUD = 1USD. As the Aussie dollar buys more US dollars, imports get cheaper, outbound tourism will boom and inflation may abate, but….on the other hand, exports, import/ competing manufacturing, inbound tourism, property and jobs will all suffer.
Is inflation that much of a problem that this should be allowed to occur?
Hopefully, at least the Federal Government will maintain its fiscal stimulus. In any event, Mr Turnbull, which schools precisely, would you deny their once in a generation opportunity for a new (“freebie”) multi purpose hall?
Whilst I may have been wrong in predicting that Australian interest rates would not rise until they do in the US, the consequences of the rise, yesterday, will seriously hurt sectors that do not need further shocks.
Another consequence of the tightening of monetary policy will be that the Federal Government will have to bring in a tough Federal Budget next year if it is to avoid unnecessary rate rises now that Mr Stevens has put his hand on the interest rate trigger. Will the Federal Government want to have a tough Budget before the next election? I don’t think so. No wonder it’s looking for an excuse for a double dissolution. What better time then when the Liberals and Nationals are imploding.
Henk Emans, B. Comm, MBA, LREA