Dollar drop won’t spike inflation: RBA

The dropping Aussie dollar will impact inflation by only 0.2 percentage points, the Reserve Bank of Australia says.

There’s been substantial commentary in the media about the potential of imported inflation as the Australian dollar falls against its United States counterpart.

The US dollar has lifted about 12 per cent this year against a basket of currencies, driven by  huge hikes in the Federal Reserve Bank’s interest rates.

The Fed has lifted rates from near-zero to a target band of 3-3.25 per cent in a matter of months in response to 40-year highs in inflation in the USA.

The RBA has also hiked swiftly, but lagged the US.

Today, the RBA eased concerns about the rising US dollar lifting local inflation, arguing it will have a lower effect on prices than some have anticipated.

That could be as marginal as adding 0.2 percentage points to the consumer price index over the next two years, RBA assistant governor Chris Kent told the Commonwealth Bank Global Markets Conference in Sydney today.

One key reason is that the Australian dollar has barely moved against other currencies, about 2 per cent against a basket of trading partners.

Another reason is that higher rates in the US will act to substantially slow global demand.

Mr Kent acknowledged that the depreciation of many currencies against the greenback would add to inflation pressure, but said it would be felt more substantially in emerging economies.

“The smaller depreciation of the Australian dollar in trade-weighted terms than against the US dollar is important because the (trade-weighted index) typically has a greater bearing on our imported inflation than any one bilateral rate,” he said.

“The effect from the depreciation in the TWI that we have seen over the year to date of around 2 per cent is estimated to be relatively modest. 

“A rough rule of thumb from our models suggests that the level of the Consumer Price Index (CPI) will be higher by only around 0.2 per cent in total over the course of a few years.”