Does the falling Australian dollar influence interest rates?
Team Veye | 13 Dec 2021
The Reserve Bank of Australia kept the cash rate unchanged at a record low of 0.1% for the 13th month in a row during its last meeting of 2021, saying inflation had picked up but remained low in underlying terms.
Policymakers were of the view that inflation pressures are less compared to many other countries, amid modest wages growth. The board restated that it will not increase the cash rate until Australia's actual inflation was sustainably within the 2% to 3% target range.
Earlier, Reserve bank governor had told a meeting of economists that Australia remained well-placed to bear inflationary pressures triggered by the Covid pandemic without resorting to an early raising of the cash rate.
The cash rate is determined by the Reserve Bank of Australia every month (excluding January). This rate is the rate charged on loans between financial institutions (like banks), and it has a significant impact on the price of financial products.
The committee said that it will continue to buy government bonds at a pace of $4 billion a week until February, when it will review the operation. By mid-February, the RBA will hold a total of $350 billion of the bonds.
Since there is strong rebound in activity and the pick-up in inflation, economists expect the Bank to taper its bond purchases to $3 billion in February and to end them completely in August.
The Reserve Bank of Australia (RBA) also decides on where to set the benchmark interest rate. As short term interest rates are an important determinant of currency valuation.
Falling dollar adds to already existing inflationary pressure. And higher the level of inflation, the more likely it is that the Reserve Bank will bring forward its first increase in the cash rate.
Veye Pty Ltd(ABN 58 623 120 865), holds (AFSL No. 523157 ). All information provided by Veye Pty Ltd through its website, reports, and newsletters is general financial product advice only and should not be considered a personal recommendation to buy or sell any asset or security. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation, or needs. You should look at the Product Disclosure Statement or other offer document associated with the security or product before making a decision on acquiring the security or product. You can refer to our Terms & Conditions and Financial Services Guide for more information. Any recommendation contained herein may not be suitable for all investors as it does not take into account your personal financial needs or investment objectives. Although Veye takes the utmost care to ensure accuracy of the content and that the information is gathered and processed from reliable resources, we strongly recommend that you seek professional advice from your financial advisor or stockbroker before making any investment decision based on any of our recommendations. All the information we share represents our views on the date of publishing as stocks are subject to real time changes and therefore may change without notice. Please remember that investments can go up and down and past performance is not necessarily indicative of future returns. We request our readers not to interpret our reports as direct recommendations. To the extent permitted by law, Veye Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss, or data corruption) (as mentioned on the website www.veye.com.au), and confirms that the employees and/or associates of Veye Pty Ltd do not hold positions in any of the financial products covered on the website on the date of publishing reports. Veye Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services.