Aussie Dollar Falls 1% on News of No Interest Rate Increase

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MELBOURNE AUSTRALIA 25 January 2007 – It would have been nice to have been on the short side of the Australian dollar yesterday, following the release of Consumer Price Index (CPI) figures which came in at 3.3% annualised, lower than the 3.6% anticipated by economists.  Although the figure inclusive of housing, insurance and finance did show a year-on-year increase of 3.6%.

After the CPI number was released, the Aussie dollar fell by almost one cent after the market bargained that the Reserve Bank of Australia wouldn’t need to raise interest rates at its next meeting.  Seeing as the CPI data is the most important statistic, it would take a big surprise in other interest rate sensitive numbers for the RBA to act.

Senior economist at UBS in Sydney, Adam Carr said, “The Australian dollar had been supported by expectations of further rate rises.  With tame inflation, that story isn’t going to hold any more.”

While Westpac Bank’s senior economist, Anthony Thompson told Bloomberg News, “The Reserve Bank can look at this number and argue that the upward drift in core inflation has passed.”

He says on a day when the price of crude oil added $2.50 to close trading in New York above USD$55.

But, on the plus side the price of bananas has fallen in the supermarkets, although the big drop in price has probably been since the beginning of the year.  Now you can pick up a bunch for $3 per kilo, compared to $12 per kilo for much of last year.  Clearly that is a very important development and one which we should pay very close attention to when looking at the potential impact on inflation.

After all, for those families that typically buy a kilo of bananas a week they are saving around $9.  A much greater impact than someone who puts fifty litres of petrol in their car each week, who is now only saving around half of that since the price of petrol has fallen by ten cents in the same period.

Of course, it isn’t quite as simple as that is it?  For a start, the price of bananas doesn’t really impact on as many other areas of the economy.  We can’t blame higher transport costs on them.  We can’t blame higher packaging costs on bananas either.  Perhaps we could blame the higher price of banana flavoured drinks, but that is just about it.

And secondly, well our guess is that most people, like your correspondent just took the brave decision of abstaining from the curvy yellow fruit during the past year, whereas very few people will have been able to avoid using petrol to the same extent during that time.

So, before we get too excited about the prospect of the RBA having beaten inflation off with a stick, we will prefer to bide our time and see what happens next quarter.  The danger for the RBA is that they start to become complacent about inflation remaining significantly above their 2-3% target band.

“It’s only a little bit over” we can start to hear them say.  How long will they leave interest rates as they are if the CPI suddenly starts to creep to and over 4%.  Will it be too late to act then?

And what will be their capacity to act?  Soon enough talk will be focusing on the Federal election which is due by October this year.  We can hardly imagine the political pressure that the government will be applying through the media to discourage further interest rate rises.

As we said yesterday, don’t get too excited about inflation yet.  The proverbial genie is still looking fairly comfortable outside the bottle and is in no rush to clamber back in.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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