There has been frequent comment that the Australian dollar is too high. As a resource economy our currency is quite closely linked to commodity prices, with interest rates figuring prominently and then there are other factors such as unemployment, balance of payments, government fiscal policy, political events etc.
Is there any justification for a value of 103c for the AUD in the current economic environment? Commodity prices have fallen significantly and our resource industries are under real pressure. These issues seem to have been countered by our interest rates which are now very high compared to other developed economies and have encouraged a strong inflow of investment capital.
There is a problem here and in my estimate interest rates must continue to fall by at least another 75 basis points. The RBA will surely be concerned at recent major project deferrals, falling real estate prices and unemployment… Continue reading
With uncertainties prevailing in world markets there seems to be ongoing confusion about the potential for inflation.
Although there is a need to stimulate growth with lower interest rates, understandably those few central banks that still have the option of lowering interest rates are very cautious about doing so because of the potential for increasing inflation. But what are the realities of inflation? With severe economic problems in Europe and significant problems in the US economy it is very likely that we will see deflation and not inflation in the foreseeable future.
The reasons for this are that the developed world is now in a stage of low growth and falling commodity prices due to falling demand for commodities. This deflationary phase is now being driven by high unemployment, high debt, and increasingly limited access to bank credit. In this low growth environment we… Continue reading