Fed rate hike won’t force RBA’s hand, says economist

A leading Australian economist has argued that the US central bank’s decision to raise the Federal Funds rate to a 0.25 to 0.5 per cent range won’t lead to a higher cash rate here at home.

On Wednesday the US Federal Reserve opted to raise its Federal Funds target interest rate from a range of 0-0.25 per cent, where it has been for the last seven years, to the range of 0.25-0.5 per cent.

AMP Capital chief economist Shane Oliver said that the rate hike is good news for Australia to the extent that it signals a stronger US economy.

“It doesn’t signal that higher Australian interest rates are on the way though,” Mr Oliver said.

“Australian rates often follow the big swings in US rates, but in recent times they have diverged. With the Australian economy on a weaker trajectory relative to its potential than the US economy, the RBA will not be following the Fed into a rate hike.

“In fact, the odds remain that the RBA will have to cut again as the mining boom continues to unwind, the contribution to growth from housing starts to peak next year and inflation remains low.”

Mr Oliver said the main relevance of the US rate hike is what it means for the Australian dollar.

Then, he believes the Fed’s decision could delay further falls in the Aussie dollar

“But as the Fed undertakes more albeit gradual rate hikes next year, the RBA retains an easing bias and commodity prices remain weak the trend in the Australian dollar is likely to remain down with it heading to around $US0.60 sometime in the next 12 months,” he said.

[Related: US likely to raise rates by year end]

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