For those not under mortgage or rent stress, the rising Australian dollar means that overseas holidays will rise on their priority list.
The Australian dollar this week rose above 65c because our rising wages will underpin business costs and interest rates at a time when the US is heading in the reverse direction.
It’s bad news for local tourist and resort destinations, but it is the best news Reserve Bank governor Michele Bullock has had for some time.
Two months ago, the Australian dollar was looking very shaky and a number of currency traders were looking seriously at shorting the currency. Wisely, they turned to other markets.
And it’s not just the interest rate outlook differences between the US and Australia that are boosting our currency. The iron ore price has now reached a staggering $US130 a tonne level.
This will generate enormous profits for iron ore miners and of course create large Australian tax revenues to offset problems in other areas. The forward estimates were based on much lower iron ore prices.
The “unexpected” government surpluses will make it very difficult to reverse the legislated income tax cuts, which represents an enormous looming stimulation next year.
The Australian inflation rate will of course vary from quarter to quarter, but it is not going to be easy to achieve a sustained sizeable inflation reduction.
Accordingly, and the Australian dollar market believes that Australian interest rates will stay high for an extended period.
Australia’s fight against inflation is very different to the rest of the world, and those differences present unique challenges.
The impact of higher interest rates is concentrated on those who recently took out mortgages and are subject to mortgage rates that rise in line with official RBA interest rates.
Along with those under rent stress, they are being hit hard, while the majority of the community lives on relatively unaffected and in some cases benefits from the higher rates.
That means businesses in many areas can pass on higher costs to customers in a way that is not possible in countries like the US, where interest rate and other inflationary blows are spread across a wide area of the community.
Australian enterprises have their own set of challenges
In Australia, banks have concentrated their lending growth on home mortgages and for some time lending to businesses has been curtailed.
Accordingly, Australian businesses have not invested in updating equipment and technology at anything like the rate of their overseas counterparts, so Australian productivity has fallen sharply.
Where possible, profits are maintained or increased by offsetting lower productivity with higher prices to those customers not hit by higher interest rates in Australia the impact of high interest rates on inflation is also reduced by the enormous stimulation taking place as a result of the unprecedented capital works being undertaken by the states and their overall high levels of spending.
Federal Infrastructure Minister Catherine King has finally started to turn off the tap, which means state governments will have to start prioritising where they spend money. Because many of their projects are well underway, it will take time to impact state stimulation rates, but it is an important signal.
At the moment, the most important infrastructure needs are in housing but to increase dwelling construction will require less infrastructure spending so that skills can be diverted and a whole new approach to zoning and permits will be required.
In Victoria, there are signs this is about to happen, but it is not sustainable without substantial conventional infrastructure spending cuts.
Meanwhile, the rise in the Australian dollar will probably come too late for those retailers who have taken delivery of their Black Friday and Christmas stock, but it will help in the January sales.
And the downturn in the US which is curbing American inflation means the Chinese suppliers are looking at the Australian retail market to help them and are prepared to negotiate on price.
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