The Reserve Bank of Australia is poised to lift its headline interest rates yet again in early October, as other central banks worldwide lead the way in stamping down runaway inflation, and pressure is therefore being placed on the Aussie dollar. Having already hiked by 225 basis points since May and now up to 2.35%, Aussies haven’t seen sharp increases like this since the mid-1990s, and many inexperienced mortgage holders are being caught totally unprepared.
So, how is the Australian economy coping with the tightening monetary policy? Will a country well known for its strong commodities trade weather the storm and avoid recessionary conditions better than other major economies, such as the United Kingdom or the United States?
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How is the Australian dollar being impacted?
The AUD/USD continues to fall at the time of writing. Sitting at lows similar to the early months of the pandemic in 2020, at 0.66 currently, the Aussie dollar is forecast to weaken even further now that the Federal Reserve has just increased interest rates again on Wednesday by 75 basis points to 3.25%.
As rates continue to increase in the US with no sign of slowing down this year, the USD is gaining momentum and strengthening against all major currencies, and the AUD isn’t the worst performer among them so far.
Investors will undoubtedly be flocking to purchase subsequently higher-yielding assets in the US right now, and they’ll be selling and devaluing their local currencies, including the AUD, to do so. This could continue until the difference between the two country’s interest rates is reduced by the RBA matching with their own increases.
Will commodities keep the Aussie economy afloat?
Commodity prices have been higher across the board, which many attributes to the conflict in Ukraine and issues with supply chains. But whatever the cause, the Australian annual growth rate has been maintained at a decent 3.5% so far this year.
Coal exports and the agricultural industry are expected to be huge exports in the coming year with the Australian Bureau of Agricultural and Resource Economics and Sciences predicted that a record $70.3bn will be shipped offshore from Australian farms this year twice as much as a decade ago. Coal exports also exceeded $100bn for the first time in the 21/22 financial year.
Illustrating what this has meant over time, in the June 2022 quarter, the 13th current account surplus in a row was recorded. The balance of goods and services is at the highest balance on record at $16.3bn, and the terms of trade hit a record level of 4.6%.
The big question left now is how much pressure higher interest rates will put on consumer spending, which usually accounts for more than 50% of the country’s GDP.