RBA Assistant Governor Christopher Kent isn’t yet concerned about imported inflation

As stated by Christopher Kent, Assistant Governor at the Reserve Bank of Australia (RBA), imported inflation isn’t yet seen as a concern, because although the national currency has fallen lately, this fall at the moment is considered to be quite insignificant.

In his announcement, Kent noted that in trade-weighted terms (TWI), or against a basket of currencies, the Australian dollar’s dynamics in general has been within its fundamental determinants. The highest weighting in Australia’s TWI has the Chinese onshore yuan. 

Kent also outlined that usually TWI has a more substantial impact on imported inflation in Australia than any bilateral exchange rate. Over the previous year, the level of TWI’s depreciation in the country has been around 2%, which is considered comparably modest by the RBA’s Assistant Governor.

For the past half-year, the Australian dollar against the U.S. dollar has decreased by 17%, therefore, demonstrating aggressive actions of the U.S. Federal Reserve System (the Fed) aimed at the monetary policy tightening. It’s expected that the Fed will continue to stick with a “hawkish” position, thereby increasing rates and lowering commodities prices.

Since the end of spring, the RBA has raised interest rates by 2.5%. Despite the forecasts of their further growth, this month, rates were increased little, for 0.25% only.

According to Kent, the further growth of rates will occur to establish a more sustainable balance of demand and supply and under severe labor market conditions. The size and terms of these rate hikes will depend on specific data, including the response of household spending to the financial tightening.

Besides that, interest rate hikes will be influenced by forecast for inflation and labor market conditions. Thus, the Australian third-quarter consumer price index (CPI) will be published on Wednesday. Economists expect that headline inflation will reach the 32-year maximum of 7%.