Impact of Inflation and Interest Rates on Australian Forex

This assignment analyzes the role of inflation and interest rates in shaping the Australian foreign exchange market. It discusses the relationship between these factors, historical trends in Australian inflation and interest rates, and their impact on the value of the Australian dollar. The paper also examines the effectiveness of various monetary policies implemented by the Reserve Bank of Australia to manage inflation and stabilize the currency.

Running head: MARKETING
Marketing
Name of the Student:
Name of the University:
Author Note:

1MARKETING
The foreign exchange market of Australia has witnessed huge growth rate in the past
years. The foreign exchange market in Australia is the seventh largest market in the whole world.
The Australian dollar is the sixth largest traded currency but in the international market. The
growth of Australian foreign exchange market is at par in the entire forex market. The share of
Australian foreign exchange market has decreased from the past few years. The tariff rate of
Australia was lowered so as to allow free trade. This paper will highlight the role of inflation rate
and the interest rate in the foreign exchange market of Australia. There were certain new rules
which were implemented by the Australian Taxation Office for the determination of foreign
exchange policies in Australia.
Inflation rate in the Forex Market of Australia
Inflation rate and exchange rate of a country are closely related to each other. The
inflation rate in Australia was expected to be 1.90 percent by the end of September, 2017. But
the inflation rate in Australia stands at 2.20 in the previous quarters. It is also projected to be
2.20 by the end of 2020. There must be much more intervention in the inflation rate so that it
might affect the exchange rate. When the inflation rate is soaring, the central bank of Australia
will raise the interest rate so that there is slowdown in the economy and the inflation can be
brought down at an acceptable range. The Australian exchange rate became flexible during the
mid of 1970s. The crawling peg in the exchange rate involved several adjustments in the level of
exchange rate. There were also devaluations and revaluations in the exchange rate policy of
Australia. The fixed exchange rate policy of Australia made it hard to manage the money supply.
The targeted growth in the supply of money is known as monetary targeting and this is followed

2MARKETING
in Australia. The floating exchange rate policy of Australia has benefited the economy to a large
extent. It has provided a barrier against the external shock in terms of trade and thus the economy
absorbed the inflationary and the deflationary pressure which affected the exchange rate regime.
It also affected the output volatility during the past few years and thus this allowed the Reserve
bank to set the monetary policy accordingly (Pagan & Wilcox,2015).
Interest Rate in the Forex market of Australia
As the economy of nation grows over time, the prices of the goods also tend to rise and
the consumers are able to spend more of their income. If the interest rate goes drastically high,
the borrowed money also becomes expensive. The Central bank of Australia tries to foster
growth in the economy by keeping the inflation rate low. In 2009, the credit of United States
began to thaw as the economy was bottoming out. In such a situation, The Reserve bank of
Australia began increasing their targeted benchmark rate. This led to economic expansion and
the foreign investors in Australia needed more Australian dollars to make more investment. The
foreign exchange dealers also purchased the Australian and the US dollar in pair and thus this led
to anticipated demand of the Australian dollar. The traders earned an additional dividend of 30%
when the foreign exchange of Australia has risen. The foreign investors are thus finding less
attractive to invest in the Australian economy and they will move the fund in other countries to
yield better returns (Engel, 2013).
Australia is a wealthy economy and it is dependent on the mining and agriculture
industry. The non competitive cost and the higher interest rate have made it difficult for the
Australian economy to compete with the other countries. This has led to lower demand of
Australian demand. The discretionary changes which were made in the Australian dollar in

3MARKETING
various regimes have made it difficult to offer an efficient barrier against the shocks. This shift in
the floating exchange rate of Australia has also contributed to the decline in volatility in the past
few years. This has also allowed the Reserve bank of Australia to set the monetary policy of the
country a d it will also favor domestic conditions.

4MARKETING
References
Engel, C. (2013). Exchange rates and interest parity (No. w19336). National Bureau of
Economic Research.
Pagan, A., & Wilcox, D. (2015). External Review–Reserve Bank of Australia Economic Group
Forecasts and Analysis. report to the Reserve Bank of Australia.

5MARKETING