Falling Aussie Dollar Has ‘Very Modest’ Impact on Inflation: RBA

Money changer Tirth Acharya of India displays a selection of U.S. dollars (L) and Australian polymer notes (R) as the local currency reached parity in Sydney on May 14, 2012. (Torsten Blackwood/Getty Images)

While the value of the Australian dollar has fallen significantly against the U.S. dollar this year, the depreciation is expected to contribute “only a very modest uplift” to inflation, according to a senior Reserve Bank official.

Christopher Kent, the assistant governor of the Reserve Bank of Australia (RBA), said while the Australian dollar has fallen 14 percent against the greenback, it was only down two percent in trade-weighted terms.

The trade-weighted index (TWI) was created by the Fed to measure the value of the U.S. dollar against other currencies.

“A rough rule of thumb from our models suggests that the level of the Consumer Price Index will be higher by only around 0.2 percent in total over the course of a few years,” Kent told the Commonwealth Bank Global Markets Conference on Oct. 24.

Australia’s TWI has been underpinned by elevated prices of key commodity exports, such as coal exports, which exceeded $100 billion for the first time from a growing global energy crisis.

Kent also noted that Australia’s offshore debt was “well hedged” because banks issuing debt offshore swapped most of it back to Australian dollars.

“In effect, they end up paying Australian interest rates on that funding, not higher U.S. rates,” he said. “In other words, the rise in U.S. interest rates is not likely to have a significant effect on Australian banks’ funding costs.”

A pedestrian walks past the Reserve Bank of Australia (RBA) head office in Sydney, Australia, on March 1, 2022. (AAP Image/Bianca De Marchi)

While the cost of imports would be affected by the stronger U.S. dollar, the RBA expects that rising U.S. interest rates will also contribute to a decline in global inflationary pressures.

“When most of the world’s currencies depreciate against the U.S. dollar, households and firms in those economies will not be as willing nor able to pay the same U.S. dollar denominated prices for their imports,” Kent said. “Hence, we could expect those prices to decline, or at least rise less rapidly, over time.”

Inflation Primary Influence of the New Budget

Kent’s speech comes ahead of the Albanese government’s first budget, which will be delivered at 7:30 p.m on Oct. 25.

The government has faced pressures to scrap stage three tax cuts, which it had promised to keep at the election.

According to new estimates, the tax cuts would reduce the government’s tax revenue by $254 billion over a ten-year period, an increase of $11 billion compared to the previous forecast by the budget office.

Greens Senator Nick McKim called on the government to scrap the tax cuts and invest in immediate cost-of-living relief.

However, economist Robert Carling, a senior fellow at the Centre for Independent Studies, previously told The Epoch Times that the Labor government should go ahead with the cuts as it was part of a package that was implemented in stages.

“While stage three is of greater benefit to higher income earners, stages one and two were of greater benefit to lower and middle-income earners,” Carling said. “The estimated cost of stage three is less than one percent of GDP per annum.”

Treasurer Jim Chalmers said inflation was the primary influence of the new budget.

He said Treasury expects inflation to peak near the end of the year, then persist for a bit longer due to the impact of the war in Ukraine by pushing up energy prices for longer.

“But our responsibility when we’ve got lots of inflation is not to spray money around in an indiscriminate or untargeted way because that would make our inflation problem worse,” he told ABC News.