nzd news

Australia Raises Interest Rates, Another Reason to Hit Parity

Tuesday, 06 November 2007 21:41:33 GMT  |  Kathy Lien, Chief Strategist

The Reserve Bank of Australia increased interest rates for the second time this year to 6.75 percent.  This is the first time ever that the central bank has increased rates when an election is underway.  This unprecedented move highlights the degree of inflation pressures the economy faces at the current moment. 

Comments from the RBA were relatively hawkish; they said that demand and output growth has increased and they expect inflation to top 3 percent by March.  They were also surprisingly optimistic about the global economy and indicated that they expect high capacity utilization and worker shortages to persist.  In other words, they remain hawkish.  Meanwhile the Canadian dollar also hit a fresh record high against the US dollar thanks to a stronger IVEY PMI report.  Despite a significantly appreciated currency, manufacturing activity has not slowed materially.  Yet this does not mean that the Bank of Canada is not worried.  Senior Deputy Governor Jenkins said today that should the Canadian dollar remain at current levels, it would pose significant downside risks to growth.   When asked if intervention could be possible, instead of denying it, he said that in order for intervention to be effective, it would have to be followed up by other policy actions.  For the time being, we do not think intervention is likely, but if the US economy slows significantly and the loonie remains below parity, the Bank of Canada may seriously consider that possibility.  As for the New Zealand, it has benefitted from the overall rise in commodity prices.  Third quarter unemployment is due for release tonight and the numbers are expected to continue to reflect a tight labor market. 

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