Australia's falling dollar should give the Reserve Bank an even stronger reason to cut interest rates next month, a QUT financial economist has said.
QUT Business School's Dr David Willis said the recent interest rate cut has had marginal effect on Australia's currency and was the result of weaker economic indicators across the economy.
He said a further cut in interest rates would provide an impetus for spending that the economy would need in the months ahead.
"Rising unemployment and other weaker domestic economic indicators as well as a large fiscal drag caused by state and federal governments paying down debt rather than spending on infrastructure and other projects will leave a growth gap in the economy," Dr Willis said.
"Only by the RBA cutting interest rates will the economy get the economic injection it will need, particularly when you consider that the mining investment boom appears to be ending."
Dr Willis said while the dip in the Australian dollar could cause an increase in inflation, the RBA would be unwise to increase interest rates to counter it if it wanted to avoid a potential domestic recession.
"It's the mum and dad spending that is likely to create economic growth and any moves to curb this would have a negative impact on all concerned," he said.
He said if the Australian dollar dipped strongly though, the RBA would increase official interest rates and that would mean an end to cheap mortgage rates and leave consumers with less to spend while at the same time prices would increase.
"Because our dollar has been at parity with the US dollar for some time now, this has enabled imported goods to remain cheap.
"However, if our dollar falls, prices for imported consumer goods and petrol will increase, hitting families with a double-whammy of higher prices and increasing interest rates."
Dr Willis said farmers and other commodity exporters who received less for their product when the Australian and US dollars were at parity would now see a benefit from the Australian dollar dip, as would the federal government.
"Farmers and miners will receive more for their product even though commodity prices are lower, and this then passes through to higher profits and higher tax revenues for the federal government," he said.
He said he hoped the RBA would continue to cut rates as this would spur growth but if the dollar continued to dip he warned consumers to buy that new car or TV or fix their mortgage rate before prices and interest rise again next year.
Media contact: Rose Trapnell, QUT media team leader, 07 3138 2361 or 0407 585 901 rose.trapnell@qut.edu.au
