Normally, I would agree with you. In this instance, however, the RBA seems intent on not wanting to take interest rates higher (ie: operating off the back of benevolent inflation numbers rather than protecting the competitive value of the A$).
A higher A$ thus feeds (all things being equal) into a lower overall price mix due to import replacement /substitution (etc). In those circumstances, the RBA could well be using lower priced imports to contain domestic pricing pressure. In consequence of this, domestic producers potentially face the risk of having to adjust their domesyic prices to maintain a competitive balance. In classical terms, this is how some could view price deflation being imported into another country.
Short term, a higher A$ takes the heat off interest rates having to be raised in order to either cool the economy, reduce inflation risks, or facilitate balanced growth.
Medium term, however, such a strategy is fraught with danger. Further deterioration in the current account deficit will eventually reach the stage where things will have to reverse themselves. This will either occur through some sort of dollar shock, or through having to adjust interest rates.
Trouble is, adjusting interest rates in those circumstances will likely lead to an even more adverse dollar situation (ie: a rising A$).
The RBA is thus playing a rather dangerous game here.
In the circumstances, they are trying to engineer a soft landing for interest rates and for the A$ which is dependent upon the following: 1. domestic timing (ie: time in order for the heat to be taken out of domestic lending, etc) - already, at risk; 2. international timing (ie: time in order for the FED to catch up to neutrality) - somewhere in the 3-4% range.
The trouble is - the timing on 1. is shorter on the timing on 2 (ie: 3-6 months, as opposed to 6-12 months).
The RBA, therefore, is going to have to be very careful in what it does. Otherwise we could face the trifecta outcome of: 1. a slowing in domestic economic activity (due to the adverse impact of a higher A$); 2. rising interest rates (to curb speculative lending behaviour); and 3. a currency cruch (if the A$ falls out of favour, or matters such as our own debt /deficit situation becomes more apparent).
Politically, this is arguably why the Howard Government seems intent on: 1. not waiting until July 2005 in order to bring on and pass its contentious legislative reforms (ie: in industrial relations, etc); 2. bringing into Parliament now (not later) most of its campaign promises; 3. accelerating the move on T3 which (by all reckoning) should still be 18 months away.
