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Australia entering into hyperinflation? (update 5) – cash rate now 7.00%, AUD did not rally

Posted by Adrian on February 5, 2008

The Reserve Bank of Australia increased interest rates to 0.25%, bringing the overall Australian cash rate to 7.00%. As a developed nation Australia now stands out in the world economy as the only nation increasing interest rates, rather than pausing, or cutting rates like most other developed nations.

Is Australia unique? As far as the decoupling theory that eventually I suspect very soon will be put to rest. Not at all, with runway inflation, with main exports inflowing into Asia, namely China, it appears Australia has shared the extreme inflation spill over from China and the rest of Asia (Philippines, Singapore and South Korea all have inflation problems). If there is any coupling too other economies it will be the inflation aspect, yet that is a global problem, with Asia and Australia leading.

Another point, is the AUD, I thought that a rally would have occurred, at least bringing the AUD into the 0.91 -0.92 range (against the USD). I was incorrect, the AUD dropped, despite a lofty 7.00% on the AUD cash rate. The carry traders, and most investors seemed to have looked at risk aversion, rather than risk buying up the AUD. This could reiterate the myth of the decoupling theory, that Australia and Asian will be able to almost completely withstand the ‘rest of the world recession’. It appears there is too much volatility in the markets (globally) from FX and stocks. Also Australia could be on the verge of a housing collapse, not too mention the banks showing strain as they have tightened their balance sheets. Hence loans and credit will be harder to obtain.

Can Australian avoid hyperinflation? Or will Australia fall into a stagflation quickly. Whatever the case, the AUD dropping to 0.89 cents USD with recent reports of Australian mortgage backed bonds getting a downgrading in credit ratings, and an estimation that 600,000+ plus will feel mortgage strain – points to a very unstable Australian market.

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One Response to “Australia entering into hyperinflation? (update 5) – cash rate now 7.00%, AUD did not rally”

  1. shane said

    Adrain,
    I would love an update on the AU market.
    You have been doing some TOP work here and a thought about 2009 would be good!

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