No Rate Change for Australian Central Bank

Thursday, 7 October 2010

After meeting this week to discuss the state of the Australian economy, the RBA (Reserve Bank of Australia) has decided that it won't touch the key official cash rate at this meeting. That means that the official cash rate of the country remains at 4.50%.

Interestingly, compared to all of the other developed nations in the world, the Australian rate is the highest - possibly stemming from the fact that the mining and raw materials trade in the country continues to push up incomes, and make the standard of living higher each and every quarter.

Currently, the AUD/USD is trading at a high of 0.9722 - which represents an appreciation of 20% from the low that was reached during the financial crisis - at 0.8096.

Many analysts are now looking to parity for the AUD, especially given that the outlook for official rates is set to climb at the next official rate meeting (in 6 weeks). There are currently two things which are adding fuel to the fire for the Australian Dollar.

The first is of course the inflationary pressures in the economy. More than ever before, the Australian central bank has to grapple with high rates of inflation, as businesses continue to fund their operations with cheap offshore cash, and as consumers continue to take advantage of the cheaper imports brought about by the higher AUD.

Inflation can be a very difficult item to get under control, and the reserve bank is certainly feeling the strains of the 1 to 4 percent inflation target per year.

The second thing worth noting of course is the carry trade, which has actually gained a little bit of traction recently. During the financial crisis, carry trade currencies such as the AUD and NZD were heavily sold off, as investors tried to limit their risk and bring risky funds back to a safer environment (i.e. a bank in America).

However, now that risk appetite is growing once again, the carry trade currencies are certainly feeling the boost given to them by investors - especially those from Japan. You need to understand how carry trades work to be able to understand how currencies are boosted as a result of them. However, it seems clear that if you were living in Japan, with a 0.25% official cash rate, it would be much easier to invest your money in Australia and gain a 4.50% interest rate each year.

Hence, it really is only a matter of time until parity is reached on the AUD/USD.