The RBA just warned the Australian dollar is too high


The Reserve Bank could be reviewing its 2 to 3 per cent inflation target band according to former RBA board member John Edwards. The bank had reduced the rate by 25-basis points each in August and May a year ago.

'The higher exchange rate is expected to contribute to subdued price pressures in the economy. It would also cause the progress in economic activity and inflation to be slower than predicted.

Credit Agricole CIB FX Strategy Research expects next week's RBA policy meeting to reaffirm the central bank's neutral stance, noticing that the RBA has so far resisted calls to join the group of G10 central banks that have moved closer to policy normalization recently. "It implies they're a long way from raising interest rates".

Economic and financial experts across Australia believe that the Reserve Bank of Australia (RBA) will leave the cash rate on hold at 1.5% today. And even though the Australian dollar briefly slipped below the US80¢ level when the decision was released, traders quickly shrugged off the jawboning attempt and pushed the currency to US80.2¢ in late trading.

"What's more the strength in the Australian dollar will only put more downward pressure on inflation".

But it's the currency that's the sticking point, after surging more than 11% this year to hover around 80 U.S. cents.

"With the Australian dollar having rallied by 4¢ against the United States dollar since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried".

He said the economy was still expected to grow at an annual rate of three per cent for the next few years but stressed that forecast may change should the Australian dollar continue to rise.

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But the Aussie's relative strength has subdued price pressures.

Moreover, RBA is still dealing with problems concerning low rates and property.

The Reserve Bank remains hopeful that tighter prudential rules are beginning to bite.

The problem for the RBA when trying to talk down the AUD is that they effectively have their hands tied in regards to cutting policy given the housing bubble in Australia, which they see as a significant threat to economic stability.

Meanwhile, the outlook for consumer spending remains clouded.

With inflation figures appearing to be lower than expected and a bounce back in the Australian dollar, these factors might just be suggesting that it is still too early to hike interest rates in Australia.

In his statement, Dr Lowe said that although retail sales had picked up recently, "slow growth in real wages and high levels of household debt are likely to constrain growth in spending".