Over the past four months the strengthening of the Australian Dollar against major global currencies has exceeded the expectations of most analysts. During mid-April the AUD hit 22 month highs against both the GBP and USD. However, recent inflation data released by the Australian Bureau of Statistics (ABS) has forced many to question whether the bull-run is at an end.
The ABS surprised markets on Wednesday by announcing a sharp fall in inflation. Given the target rate of between 2.0 to 3.0%, the recent 1.3% print means there has been a notable downward shift in the perceived health of the national economy.
While the perils of high inflation are well documented, low inflation can also be equally harmful to a nation’s economy. Low inflation often leads to lower consumer spending and economic growth. As a result of this, unemployment rates generally rise. Although low inflation has been commonplace within the Eurozone and North America, this is the first time Australia has recorded such figures since December 2008 and it coudl put pressure on the AUD.
Monetary policy is the conventional tool used to address low inflation, so attention will turn to the next Reserve Bank of Australia announcement. At an already historic low official cash rate of 2.00%, any further rate cut would lead Australia into uncharted territory.
– Jason Chown