Unintended Outcome: Interest Rates Under Pressure

When the Australian dollar started going up in relation to the US dollar it was reported by the popular press as a good thing. Fun for all. The Aussie dollar went up though US$0.80 then US$0.90 to $US0.95 and then broke the barrier of “parity”. One Aussie dollar had the same value as one US dollar.

Unheard of. Never imagined to happen. The world was ours.

It was all beer and skittles. Stockbrokers and finance houses actually had “parity parties” complete with champagne and dancing girls [Okay. I made the bit about dancing girls up, but it just seemed to flow on nicely from the champagne, so to speak. Anyway it is safe bet one or two of them did have dancing girls, or a close approximation thereof].

Almost everything sold in Australia was about 20 percent cheaper. Everything imported anyway—which is about 90 percent of EVERYTHING you can buy in a shop in Australia. Everything except for petrol and anything made by Apple; because Apple has its retailers locked into very tight contracts that do not allow them to ‘discount’ or change the prices of anything made by Apple without Apple agreeing to it—which they never do. The price of Apply products ONLY change if and when Apple say they can.

On SkyNews tonight the Aussie dollar is buying US$1.092 and there are forecasts of it getting to US$1.15 before hitting the ceiling.

But the problem now is that inflation in Australia, which was already getting a nudge from other problems like the increasing cost of food and petrol, is now being pushed up by the higher value Aussie dollar.

While just two months ago there was talk of the Reserve Bank reducing the wholesale interest rate now the talk has swung around heavily to unavoidable increases in the interest rate. The only discussion now is whether it will go up by half a percent or a whole percent point by the end of the year.

This is the unintended outcome. Wholesale interest rates going up, when at the start of the year the thinking was that it would be coming down.

With inflation now running well over the high bar limit of three percent per annum it seems the Reserve Bank has no option but to push the wholesale interest rate up. And if the dollar does get to US$1.15 then it is likely it will be going up by the full 1.0 percent before the end of the year.


P.S. I am not an economist. I did not even do economics as part of my studies (I often wish I had). Most of the above comes from readings in the Australian Financial Review (AFR) and the popular news.