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RBA to leave rates on hold

Australia’s falling dollar could force the Reserve Bank of Australia (RBA) to leave the official cash rate on hold tomorrow.

The Australian dollar is starting to act as a shock absorber for the Australian economy.

The Australian dollar is now 11 per cent lower, on a trade-weighted basis, than it was in mid-April.

From the RBA’s perspective the fall in the Australian dollar will be the key development affecting its policy view. General rules of thumb suggest that a 10 per cent depreciation could add around 0.3 to 0.4 percentage points to the consumer price index each year, which all else equal, would lift the RBA’s inflation forecasts to around the middle of the target band by end-2013.

The depreciation should also support Australia’s growth rebalancing act. In terms of the outlook for rates, much depends on where the Australian dollar settles. The recent fall in the dollar gives the RBA time to hold steady this month, but there is still some room for it to cut further if needed.