Weight will stay on the $A
By Lucy Battersby | theage.com.au | 16 November
The US Federal Reserve is unlikely to make any moves to raise its official cash rate for at least a year, according to the chief economist of BNP Paribas — a scenario that would keep the Australian dollar in high demand and push more money into global equities markets.
The Fed had always waited at least 12 months after unemployment peaked before increasing the official cash rate, said the head of market economics at international investment bank BNP Paribas, Paul Mortimer-Lee.
As unemployment had not peaked, the official cash rate would probably stay at 0.25 per cent during 2010, Mr Mortimer-Lee told BusinessDay.
It normally took 12 to 20 months for increased consumer spending to start pushing pressure on inflation, he said. The Fed confirmed on November 4 that it was unlikely to raise interest rates for some time.
The Australian dollar hit US93¢ several times last week and is expected to reach parity in coming months, before declining to around US85¢.
Mr Mortimer-Lee's forecast has implications for the Australian dollar, because global demand for it will decrease as soon as bankers think the Fed is going to start raising US interest rates.
Australian dollar-denominated investments are in high demand because high Australian interest rates give better returns than US dollar, sterling or yen-denominated investments.
According to data compiled by Bloomberg, market analysts do not expect the Federal Reserve to increase the cash rate until September 2010.
Australia's official cash rate, however, is expected to keep increasing as unemployment appears to have peaked and the Reserve Bank says it can no longer justify keeping the official cash rate at emergency low levels.
The three-month inter-bank lending rate was heading towards 4 per cent on Friday, which implies that Australia's official cash rate would reach at least 3.75 per cent by mid-February.
Expectations of low interest rates in the US also have implications for global equity markets, according to the managing director of US-based SMH Capital Markets Group, Stephen Nash.
"There is $US3.3 trillion currently in US money market funds earning less than 1 per cent, down from $US3.9 trillion at the beginning of the year," Mr Nash said.
Out of the $US600 billion which had entered investment markets, less than $US20 billion had gone into US equities, he said — most going into bond funds and international equities.
With interest rates staying low, the owners of the remaining $US3.3 trillion were more likely to put their money into international equities than bonds or US equities, Mr Nash said.
First published by TheAge.com.au on November 16 2009
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