Strong AUD may pause interest rate rise

The improvement in the Australian dollar could force the RBA to leave rates on hold once again when the Board meets next month.

The Australian dollar has almost caught up with the US dollar. Further appreciation from here could mean less rate rises may be needed next year as the improved exchange rate works to slow the economy.

Previously economists have predicted that the RBA could hike rates by 100 basis points throughout 2011.

I don’t think the strength of the Australian dollar would change the view that there will be another rate hike this year.

The appreciation of the AUD seen so far is not enough to change the forecast for a 25bp rate rise by end-year in my view.  I expect this hike to occur in November, but will be watching the CPI released October 27 and credit data released October 29 closely to confirm.

I still expect rates to rise by another 100 basis points over 2011, though further appreciation of the exchange rate could start to dampen that expectation. Of course if the exchange rate depreciated sharply from here, which would likely reflect a negative global shock, it would be necessary to reassess the interest rate forecasts.



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