Just yesterday Australia and India hiked interest rates, due to concerns about domestic inflation.
Their economies are growing nicely, but ultra-loose monetary policy in the U.S. is flooding them with capital they’d rather not have. While loose monetary policy may suit the U.S. economy right now, it’s problematic for fast-growing economies abroad who can’t shield themselves from the global influence of Fed policy.
Thus, as HSBC says, nations like Australia have engaged in ‘quantitative tightening’, in a bid to battle back inflationary forces spilling out of America.
Australia’s latest surprise interest hike may be too little too late however. Inflation is already out of hand since interest rates have been lower than inflation for 26 months, ie. real interest rates have been negative, according to Lombard Street Research.
“Inflation is 9.8pc and is is going to get worse as the Fed’s QE2 pushes up food prices, so a quarter point rate rise is not going to make much difference. They are relying on ‘administrative measures’ instead of doing what they need to do,” she said.
Ms Bhandari said the authorities had let rip with a “huge monetary and fiscal boost” before the elections in May 2009, leaving a legacy of overheating that is now coming back to haunt. The combined central and state budget deficit – including fuel subsidies – is nearly 11pc of GDP.
HSBC’s currency team said the Australian dollar may be nearing its peak. “One concern relates to the deflating of the property bubble in China. This could happen gently but, if not, the Aussie will not avoid the fall-out. A sharp fall in Chinese property prices may very well lead to a deep examination of Australia’s property bubble, and Australian banks,” they wrote in a client note.
The report said Australia’s lenders rely heavily on funding from abroad to finance the country’s internal boom, creating a risky mismatch in liabilities. “Rationally or irrationally, this could turn very sour. The Aussie party looks set to come to an end soon,” it said.
The Aussie dollar is now at parity with the U.S. dollar, but this could be just the final hurrah before the fall.