The Australian dollar has tumbled as the Bank of Australia (BoA) has raised interest rates to record highs to counter rising inflation.
The move is expected to help push the national currency to its highest level in more than a year, but some economists are worried the move could further erode confidence in the Australian economy.
Read moreRead more1:16:11The BoA’s decision to hold its key rate at 2 per cent from 2 per in June will take effect from the end of the year, and its key interest rate is set to remain at 2.75 per cent until at least the end, which will see a significant spike in the dollar.
“There is a lot of uncertainty surrounding the long-term prospects for the Australian currency and the broader global economy,” Bank of America Merrill Lynch senior economist Robert Goglia said in a note to clients.
“However, if inflation expectations are driven by expectations of further economic and monetary policy easing from the Fed and the BOA, the BoA will likely be cautious in raising rates.”
This would likely increase the value of the dollar against the dollar and potentially lead to the currency depreciation.
“The central bank’s move has been praised by economists and investors as a positive sign for the economy.”
It is encouraging that the BoC is taking a long-overdue rate hike in a country where the jobless rate is at 7.5 per cent and the economy is still struggling to recover from the global financial crisis,” the Australian National University’s Andrew Forrest said in the statement.”
The BoC has raised rates for two years, and the Fed is now signalling that it will do likewise again next year, meaning the country is set for a major policy rate hike.
“The move has caused the AUDUSD to rise to $US1.2968 from $US12.26, the highest level since December 2017.
The Bank of Japan has already increased its key lending rate by a quarter of a percentage point to 1.5 percent.
The BoB’s decision has been welcomed by the BoJ’s governor, Haruhiko Kuroda, who said it was a “positive signal” for the global economy.
But the BoM’s chief economist, Richard Harrison, said the move raised doubts about the BoP’s ability to tackle rising inflation and economic weakness.”
For now, we don’t know what the effects will be on inflation and unemployment, and we are not in a position to provide a forecast of the impact on the economy,” he said.”
Our best guess is that we could see the BoB raising rates again and the BoE possibly increasing its key policy rate again, but there is no certainty at this stage.
“In addition, we could also see the BOB’s stance towards tightening its policy further, but we have little information on what that stance might be.”
The BoP also lowered the BoS interest rate by half to 0.75 percent, the lowest rate in 10 years.
The AUDUSD has rallied by more than 50 per cent since the start of the month, but has dropped more than 20 per cent against the US dollar.
The US dollar fell to a record high on Friday, as investors bought the dollar’s value in anticipation of a stronger economy and Fed rate hikes.
But in recent weeks, the Australian Dollar has tacked lower as concerns have mounted about the effects of a possible rate hike by the Fed.
The dollar has fallen about 26 per cent in 2017, after recovering from a record-low of about 77.3 cents US at the end for November.
“People are buying dollars because they think it will help their purchasing power,” said Mr Harrison.
“But they are getting caught up in the perception that the US is stronger and more competitive, which in turn is pushing up the dollar.”
Read moreTopics:economic-trends,currency,international-aid-and-trade,international finance-and-$,global-financial-institute,united-statesFirst posted November 20, 2018 07:15:24Contact Emily AyliffeMore stories from New South Wales