Daily Commentary BY THE CURVE TEAM –

The FOMC’s Actions Have Implications for our Own Monetary Policy Settings

28th of September, 2018

The US Federal Reserve’s decision to lift rates yesterday and the ongoing strong language around the outlook continued to reverberate around financial markets. The actions of the Fed and the subsequent impact will have an increasing impact on our own monetary policy.

Markets continue to digest the latest move by the Fed overnight with currency markets feeling the most heat. The USD was stronger across the board with the Aussie one of the big losers on the night.

The moves reinforce the importance of the keeping a close eye on what is happening in the worlds largest economy as those decision being made on monetary policy offshore will have an increasing impact at home here in Australia.

After rising and rejecting a down trend line that has been in place since the AUD was back up at 0.81, the Aussie is on the back foot again. As the cash rate differential between the US and Australia continue to widen, the AUD, all other things being equal, will remain under pressure.

A lower AUD has a loosening effect on monetary policy and is good for growth. It also helps offset some of the impact from the out of cycle mortgage increases that have been coming from the banks over the past few months.

It will need to continue to do so as the other side effect of the Fed’s policy path is increased pressures on funding costs for our local institutions. As rates rise offshore and the US Treasury further crowds out other borrowers as they borrow more and more to fund a growing deficit, our banks need to turn to the local market for funding where there growth in deposits is scarce.

Increased competition for a finite pool of deposits keeps upward pressure on rates, and in turn funding costs, which eventually get passed on to borrowers.

The falling AUD and rising borrowing costs are likely to continue to make the RBA’s job a little more complicated. It also means that their need to change the current stance of monetary policy will remain diminished for a little while longer.

David Flanagan

Director - Interest Rate Markets