The Reserve Bank of Australia must be feeling pressure to provide financial markets with explicit forward guidance on the long-term direction of its interest rate strategy. These days, with central banks all over the world providing markets with forward guidance on rates in an effort to shape market expectations, the RBA is one of the few remaining major central banks to maintain a sense of anticipation at each meeting – rates could just as easily go up as they could go down. Even the European Central Bank has finally backed away from its sacred no “pre-commitment” policy. Check out my previous post on forward guidance here.
Increasingly these days, what was once considered to be “abnormal,” markets are beginning to construe as “normal.” A central bank that doesn’t provide forward guidance is increasingly seen as hawkish (“do they have something to hide?”) and markets tend to react by driving up its bond yields and their respective currency – effectively tightening financial conditions.
Having just returned from a two-week tour of Eastern Australia, I can confidently tell you that the Land of Oz is blessed with many great things: sunshine (a novelty for a Londoner like me), beaches, vineyards, and great food. But these blessings all come at a very high price. Everything – from food to clothes – seemed mighty expensive. And coming from a Londoner that’s saying something!
The very sharp appreciation in the Australian dollar goes some way to explaining the tremendous rise in prices. In the span of four years, the Australian dollar has strengthened from US$0.63 to US$1.05. All else being equal, that implies a virtual doubling of prices! So whereas a pizza in Australia may have cost around US$15 in 2009, it now goes for around US$25.
The incredibly powerful performance of the Australian economy over the past few years has contributed to this sharp strengthening of the Aussie dollar; meanwhile, the European and U.S. economies have been redefining the term “tepid recovery.” Read more