AUD TWI Rather Than AUDUSD Matters For Inflation

The RBA’s Assistant Governor (Financial Markets) Kent spoke today on “Exchange Rates and Inflationary Pressures”. He concluded that the TWI is what matters for Australian inflation rather than the AUD versus the USD, and that the RBA’s models estimate that the 2% TWI depreciation year-to-date could add 0.2% to the level of the CPI over a few years.

• Kent’s comments on current monetary policy were exactly in line with the RBA’s meeting statements. He said that rates need to rise further, that wages growth is lower than other advanced economies, and the size and timing of future policy moves are dependent on the “incoming data”, including inflation, labour market and household’s reaction to tightening,.
• The impact of the strong USD on emerging markets is of note, as it could be destabilising due to the high levels of foreign debt. Kent stated that this is not a problem for Australia as its overseas debt is well hedged.
• Kent discussed the exchange rate and wage developments during and after the mining boom. He said that the long period of moderate wage growth Australia saw after the mining boom and leading up to Covid was an adjustment to restore the international competitiveness of the Australian labour market that it lost during the boom and to absorb spare capacity in the economy.
• Read RBA Assistant Governor (Financial Markets) Kent’s speech here.