Reserve Bank of Australia: lower Australian Dollar or lower inflation

Posted: April 28, 2014 in Uncategorized
Tags: , , ,

The Reserve Bank of Australia (RBA) has an issue (well more than one).

It does want a lowed Australian Dollar to stimulate the economy.

But a lower Australian Dollar will increase inflation and spike up the interest rate slowing the economy and propping higher the Australian Dollar.

Why?

The Australian Inflation is composed by two baskets, a tradable (EG imports) and non- tradable (electricity costs, rents..).

As anyone in Australia at least subconsciously knows, the cost of living (mainly non-tradable) increased much more than the headline inflation. Notwithstanding that, we have a very low inflation number. The reason is because the tradable basket, due to the currency, has been actually in deflation.

If the currency goes lower….inflation will automatically spike,

In effect a slightly higher dollar than necessary should be better for the RBA.

 

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