More from RBA Governor Lowe: Diluting Market Expectations of a 4% Cash Rate by Year-End

Reserve Bank of Australia Governor Lowe

  • Says 4% cash rate by year-end: ‘I don’t think that’s particularly likely’
  • says it would have a major impact on the economy

(i.e. you mean by ‘first order’ that it would drastically slow down the economy)

Lowe rules out the market price of a 4% cash rate by the end of the year. Lowe goes on to say that the market has done a better job of pricing rates than the Bank. Which is true, the Bank’s projections have been dire. However, the 4% year-end rate is also a bit silly, the markets aren’t always right either.

Plus:

  • still wants to see 3.5% annual salary growth
  • continued wage growth in the 4-5% range would make it difficult to reduce inflation

inflation

Inflation

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency effectively buys less than in previous periods. In terms of assessing the strength of currencies, and by extension the exchange rate, inflation or its measures are extremely influential. Inflation stems from the general creation of money. This money is measured by the level of the total money supply of a specific currency, for example, the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a more rapid increase in the money supply relative to the wealth produced (measured by GDP). As such, this creates demand pressure on a supply that is not growing at the same rate. The consumer price index then rises, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies at various levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country based on the general level of prices. In doing so, this makes it possible to determine the country with the most expensive cost of living. Consequently, the currency with the higher rate of inflation loses value and depreciates, while the currency with the lower rate of inflation appreciates in the foreign exchange market. Interest rates are also impacted. Inflation rates that are too high raise interest rates, which has the effect of depreciating the currency in the exchange rate. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency in the foreign exchange market.

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency effectively buys less than in previous periods. In terms of assessing the strength of currencies, and by extension the exchange rate, inflation or its measures are extremely influential. Inflation stems from the general creation of money. This money is measured by the level of the total money supply of a specific currency, for example, the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a more rapid increase in the money supply relative to the wealth produced (measured by GDP). As such, this creates demand pressure on a supply that is not growing at the same rate. The consumer price index then rises, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies at various levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country based on the general level of prices. In doing so, this makes it possible to determine the country with the most expensive cost of living. Consequently, the currency with the higher rate of inflation loses value and depreciates, while the currency with the lower rate of inflation appreciates in the foreign exchange market. Interest rates are also impacted. Inflation rates that are too high raise interest rates, which has the effect of depreciating the currency in the exchange rate. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency in the foreign exchange market.
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