Reserve Bank to Leave Interest Rates at 3.25%?


Peter Lavelle - 1.11.2012

Latest Exchange Rate Changes

Currency pair25.10.201201.11.2012 Percentage change
Pound to Aussie1.5491.559+0.646%
Euro to Aussie1.24981.2487+0.088%
US dollar to Aussie0.96580.9650-0.083%

The Australian dollar shed a cent against the UK pound this week, chiefly as the markets come to believe the Bank of England will now not extend its program of quantitative easing when it meets next week. This leaves sterling at almost the precise level we found it at the start of September.

The Aussie dollar is meanwhile all but unchanged against the euro and US dollar, as reports that the Reserve Bank of Australia will now not cut interest rates next week offset pessimistic reports from Australian manufacturing. This means the Aussie has sat still against the euro for a fortnight now, while marking a respite in its wild oscillations against the greenback.

How Does this Affect You

In one respect, this week's movements are positive, if you're already in Australia and wish to repatriate money outside the country. This is because the Australian dollar has so far proven wrong the widespread forecasts that it would decline, as Chinese manufacturing slows (Australia's biggest export market) and commodity prices sink.

This arguably reflects the fact that, post-financial crisis, we're seeing the makings of a new world order here. Australia, once a small and arguably marginalised country in terms of international politics, has come into its own, as the country best poised to benefit from China's ascent. That's seen the Australian dollar climb and climb, and could be a permanent change.

What Affected the Rates this Week

The Bank of England mothballs its printing press

The UK pound won a cent from the Aussie this week, chiefly as the Bank of England downplays expectations it will print more money to stimulate the UK economy. Speaking yesterday at a speech in Hull for instance, Charlie Bean, the Bank of England's deputy governor, said the impact of QE was limited "when the environment is so dominated by uncertainty about the outlook for demand."

This benefited the pound because, the less sterling there is in supply, the more valuable it becomes. In this sense, currencies work just like other goods. If there's less milk for sale in the shops for instance, what milk there is will increase in price. So it as with the UK pound this week.

The RBA looks set to hold rates at 3.25%

Meanwhile, the Australian dollar didn't fall further (and held its own against the euro and US dollar), as the Reserve Bank of Australia looks less likely to cut interest rates below 3.25% when it meets next week. This reflects the fact that its cut last month has been broadly successful at stimulating Australia's economy, with Australian building permits jumping 7.8% in September.

Higher interest rates support the Australian dollar because, if the RBA is no less likely to cut rates, that raises the available returns for Australian bonds and equities. That therefore makes the currency more attractive, which increases (or at least supports) its value.

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