Reserve Bank of Australia Governor Lowe is speaking on:
- Inflation, Productivity and the Future of Money
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Headlines via Reuters:
- Welcome the announcement today by the government of the details of the review
- CPI for the June quarter will show a further step-up in inflation
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods. Inflation stems from the overall 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 faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods. Inflation stems from the overall 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 faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Read this Term rate, another step-up is expected later this year - Stronger productivity growth is likely to mean a higher neutral real interest rate
- Recent trends in productivity growth have not been particularly encouraging,
- We don’t need to return inflation to target immediately
- We do need to chart a credible path back to 2–3 percent
- Important consideration is how inflation expectations and the general inflation psychology in the community evolve
- Possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty
- Neutral nominal rate is at least 2½ per cent. It would be higher than this if medium-term inflation expectations were to shift higher.
- Emphasize that the concept of the neutral rate is no more than one reference point for the board.
- The path back to 2–3 percent inflation requires an increase in supply and some moderation of demand
- Neutral is not the basis of a mechanical rule and we are not on a pre-set path to achieve any specific level of the cash rate
- Board expects that further increases will be required over the months ahead
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Lowe, and the Bank, have their eye on how households will respond to higher interest rates and higher prices. His ‘narrow path’ that is ‘clouded in uncertainty’ remark is accurate. While the RBA is trying to navigate this path they’ll also be navigating a review into its operations. I reckon this is going to get real ugly for the RBA and Australia before it gets better.
There will be more from Lowe ahead in the Q&A session. I’ll have more to come on this separately
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Full text:
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Live audio is available from here:
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Where the RBA cash rate is currently at:
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