Implications of US Interest rate rise

This is the Eccles Building which serves as the headquarters of the United States Federal Reserve.

(Australian Associated Press)

WHAT A US INTEREST RATE HIKE MEANS FOR AUSTRALIA

The US Federal Reserve holds its much-anticipated policy meeting this week and there is a chance it will raise its interest rate for the first time since June 2006.

The US economy is finally dragging itself out of the ‘great recession’. Unemployment has halved in the past six years to 5.2 per cent.

The Federal funds target rate has been set between zero per cent and 0.25 per cent since late 2008.

The announcement is expected early on Friday morning AEST.

HOW A US RATE HIKE COULD AFFECT THE AUSTRALIAN DOLLAR

Part of the reason the Australian dollar has lost a quarter of its value against the US dollar in the past 12 months has been speculation of a US rate hike, along with falling commodity prices.

A rate rise will put more downward pressure on the Aussie dollar, especially if the Fed signals more rate hikes are in the pipeline.

The US dollar has been rallying against most currencies, so the Aussie is not alone in losing value in the past year.

WHAT DOES A WEAKER AUSTRALIAN DOLLAR MEAN FOR THE ECONOMY?

A lower exchange rate boosts exports by making them cheaper, makes locally produced goods more competitive with more expensive imports, and helps increase tourism from overseas.

Reserve Bank governor Glenn Stevens has been calling for a weaker currency in order to help the non-mining parts of the economy, such as retail and tourism.

WHEN DID THE US RATE RISE SPECULATION START?

In April 2013 when the Australian dollar was worth around 105 US cents.

It was at this time the Fed started to consider winding down its $US85 billion-a-month economic stimulus program called quantitative easing (QE).

QE is a central bank policy that floods the banking system with new money, in the hope banks will increase lending to households and businesses.

QE and very strong commodity prices were part of the reason the Australian dollar hit an all-time high of 110.81 US cents in July 2011.

The Fed couldn’t cut its interest rate any further because it was near zero and the only alternative appeared to be “printing” more money.

The Fed ended its third round of QE in October 2014.

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