A good column in the AFR today from David Bassanese:
If the dollar were start to fall in earnest – other things being equal – the RBA would be forced to revise its inflation forecasts upwards, making further interest rate cuts even less likely.
What’s more, while the carbon tax is expected to only modestly and temporarily push up inflation – as its effect is hard to precisely quantify, it will further complicate the assessment of inflation trends in the coming year, and force the RBA to be especially cautious.
All that said, with large downside risks still hovering over Europe – and weak hiring intentions suggesting the unemployment rate will drift a bit higher in the next few months – the bias on local interest rates remains to the downside.
I’d still count on at least one more rate cut by year end due to another European blow-up. And if save-haven flows keep the $A high even in the face of weaker global growth, it would only add to the case for lower interest rates.
But so far at least, it’s hard to argue the $A is seriously overvalued. The real challenge will come in later years if it stays high even as the terms of trade drop further and the mining investment boom starts to wane.
