Originally posted by Mikhaila
Lastly, why RBA has to lower the rate to be inline with the world market? If RBA doesn’t want to cut the rate it will not, and if it will the reason will mainly to do with Australian economy (drought, war expenses etc.)
the reason they would change the interest rate is ......having a higher interest rate compared to the rest of the world means net K inflows increase....(think of the country like a bank offering a higher interest rate - they get more new business) this introduces currency issues....
if the forex rate moves outside target range then a cut/rise would occur......
having said that this assumes perfect mobility of K (which is another lame economic assumption that doesnt hold true in the real world) the limited mobility of K means currency changes lag behind interest rate movements... so much so (that in the current situation) i feel the RBA is paying only a limited amount of attention to differentials with the rest of the world