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Strong dollar dampens rate hike expectations

11 October 2010 Reporter

Jessica Darnbrough

The improvement in the Australian dollar could force the RBA to leave rates on hold once again when the Board meets next month.

Last week, the Australian dollar nudged almost parity with the US dollar. Further appreciation from here could mean less rate rises may be needed next year as the improved exchange rate works to slow the economy.

Previously economists have predicted that the RBA could hike rates by 100 basis points throughout 2011.

HSBC chief economist Paul Bloxham said the appreciation of the Australian dollar would not change the company's view that there will be another rate hike this year.

"We think the appreciation of the AUD seen so far is not enough to change our forecast for a 25bp rate rise by end-year. We expect this hike to occur in November, but will be watching the CPI released October 27 and credit data released October 29 closely to firm up that view," Mr Bloxham said.

"We still expect rates to rise by another 100 basis points over 2011, though further appreciation of the exchange rate could start to dampen that expectation. Of course if the exchange rate depreciated sharply from here, which would likely reflect a negative global shock, it would be necessary to reassess the interest rate forecasts."


Strong dollar dampens rate hike expectations
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