Five-year low fuels worries over rising costs and delayed rate cuts
The Australian dollar has fallen to 61 US cents – a decline that has sparked fears that higher import costs could prevent the Reserve Bank of Australia (RBA) from cutting interest rates, dashing hopes of relief for mortgage holders.
Westpac chief economist Luci Ellis (pictured above), however, pointed out that the exchange rate is only a small factor in the RBA’s rate decisions.
“What’s really going on is the US dollar is strong,” Ellis told Daily Mail Australia. “The reason for that is that market participants have changed their minds about what they expect the Fed will do. They’re now expecting that the Fed will not cut rates as much as they previously thought.”
Ellis noted that some analysts, including those at the Royal Bank of Canada, now believe the Fed may avoid further rate cuts entirely, making US dollar-denominated assets more appealing to investors. “It’s not us, it’s them,” she said.
Australian dollar continues to plunge against the USD: Here's what the 'bloodbath' means for your mortgage https://t.co/4wKy1W1ZRz
— Daily Mail Australia (@DailyMailAU) January 14, 2025
The dollar’s weakness has coincided with a drop in consumer confidence, with perceptions around job security falling 2.8% to 127.2%. This decline comes despite Australia’s unemployment rate remaining low at 3.9% in November.
“Consumer confidence around jobs continues to deteriorate even though recent official data on unemployment has remained low and job vacancies have increased,” Ellis said.
While the drop in the Australian dollar has generated negative headlines, Ellis suggested it is only having a limited effect on broader economic sentiment.
Despite the currency’s recent depreciation, Ellis argued that its impact on the RBA’s decisions is minimal compared to other factors, such as inflation and the labour market.
“It’s not a major impact on what the RBA is going to decide,” she said. “More important is whether inflation is coming down quickly enough and whether the labour market is still easing.”
Ellis said that the RBA views the labour market as “overtight” and is monitoring whether conditions are beginning to ease. Recent data shows mixed signals: while unemployment fell in November, job vacancies also increased, suggesting the labour market may not be loosening as expected.
“If that’s the case, then the RBA is going to be worried that demand in Australia is still outstripping supply,” Ellis said, which could influence their outlook on inflation more than the exchange rate.
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