AUD and NZD are traditionally high-yielding currencies. Historically, foreign currencies also tend to trade within a band. Therefore, when it was reported in the news that the AUD was at a historical low, my brother and I felt it was a safe bet to park our non-emergency money there and just let it grow. Even if the exchange rate doesn't appreciate in our favour, we would still have the high interest to fall back on, not forgetting the power of compounding. However, our plan turned out to be not as foolproof as we thought and we were hit by the interest rate cuts, although Australia has started to restore them back to historical levels (see below).
SYDNEY - AUSTRALIA announced its fifth rate hike since October on Tuesday and said borrowing costs would continue to rise as growth and inflation return to normal after the global crisis.
The Reserve Bank of Australia (RBA) lifted the official cash rate 25 basis points to 4.25 per cent, underlining confidence that the country has seen off the downturn unscathed and must now work to moderate prices.
'The board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,' RBA governor Glenn Stevens said in a statement.
Australia was the first developed economy to lift rates after the world's biggest financial shock since the Great Depression, raising them 25 basis points to 3.25 per cent in October and a further four times since.
The Reserve Bank is now unwinding its emergency cuts of late 2008 and 2009, when interest rates were slashed by 425 basis points to a five-decade low of 3.00 per cent as the world economy tanked.
'Australia's terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector,' Mr Stevens said. 'The rate of unemployment appears to have peaked at a much lower level than earlier expected. 'The process of business sector de-leveraging is moderating, with ... indications that lenders are starting to become more willing to lend to some borrowers.' -- AFP
Disclaimer: Rates plotted are for 3-mth fixed deposits with OCBC, and not RBA nor RBNZ rates
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