Markets: Forgiving inflation

The central bank is unconcerned with a slightly higher than expected inflation outlook, paving the way for more rate cuts.

Congratulations to those forecasting a rate cut. You may be very right. Get an extra dose of congratulations if you are also predicting further falls in the Australian dollar. The Reserve Bank of Australia seems fine with the prospect of a lower cash rate as well as an even weaker currency.

“The inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand,” says the Reserve Bank minutes of its July monetary policy meeting. “Recent data suggested that domestic economic activity continued to grow at a below trend pace.”

The Australian dollar has fallen 13 per cent against the US currency since April 11, according to Bloomberg data. But the Reserve Bank says the Australian dollar “remained at a high level”.

“It (is) possible that the exchange rate (will) depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy,” says the central bank.

At 1214 AEST the Australian dollar was at US91.63 cents, up from US90.98 cents yesterday, according to Bloomberg. The S&P/ASX200 Index was down 5.006, or 0.1 per cent, to 4976.10, after rising as high as 4999.30.   

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