Local dollar to hit 47 US cents, says bank
AAP
The Australian dollar will hit an all-time low of 47 US cents by the middle of next year, a major French bank says.
Meanwhile, some economists are expecting official interest rates to fall to their lowest sustained levels in almost half a century as Australia grapples with the most turbulent economic period for many years. BNP Paribas says the domestic currency will plunge by the June quarter of 2009 from its present level of 65 US cents, as the economies of Australia's major trading partners soften.
"The slowdown in the economies of Australia's main trading partners, particularly in Asia, implies that export demand will soften," the bank said in a global outlook report for December 2008. The Australian dollar fell to an all-time low of 47.78 US cents in April 2001 in the wake of the "tech wreck".
A tumble to 47 US cents would represent a 52 per cent dive since mid-July when the Australian dollar reached a 25-year high of 98.49 US cents. The Australian dollar fell to a five and a half year low of 60.12 US cents in late October.
BNP Paribas said that, while a weaker Australian dollar would push up import prices, domestic inflation was likely to be slow in the near term as crude oil prices plunged and the economy experienced "sub-potential" growth. Debt futures markets are expecting Australian official interest rates to fall to 2.75 by April 2009.
The cash rate fell to 2.89 per cent in January 1960, according to snap shot data of official interest rates from the Reserve Bank of Australia (RBA). Official interest rates have not been below this level on a sustained basis, RBA records going back to 1959 show.
AMP Capital Investors chief economist Shane Oliver says the cash rate will fall to three per cent by June 2009. "The RBA will want to get rates down rapidly, taking them to levels not seen since the 1960s," he said.
If the cash rate falls under three per cent, repayments on an average $250,000 standard variable home loan would fall by 23 per cent to $1,380 a month, from $1,790, mortgage calculators show. Dr Oliver said Australia was likely to enter recession in the second half of next year as the world's biggest economies contract, and emerging economies like China slow rapidly. "The economic threat to Australian growth from the global slump is the biggest seen in the post-war era," he said.
"We have a situation in the advanced world where all three major economies - Europe, Japan and the US - will be in recession next year." An economist with financial markets research group 4CAST, Mick Turner, predicted a 2.5 per cent cash rate by the middle of next year.
"There's going to be a fairly prolonged period of balance sheet consolidation with households: you're going to get a situation, even though credit is cheaper, (in which) people won't use extra income to spend," he said. A "nasty" decline in Australia's terms of trade, the ratio of export to import prices, also will lead to dampened income growth, Mr Turner said.
BNP Paribas expects Australian gross domestic product (GDP) growth to be flat in 2009, but says the economy is likely to avoid recession as the RBA cuts rates aggressively. "We expect GDP growth to slow to close to zero," the bank said. "However, with aggressive fiscal and monetary policy easing, Australia is likely to be spared from recession."
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