Following the transition away from the mining investment boom in 2013, the Reserve Bank of Australia (RBA) progressively lowered its cash rate target from 4.75% in 2011 to 1.5% by August 2016 to support non-mining sectors. (5)
However, sluggish wage growth and low inflation persisted. In response to global economic disruptions in early 2020, the RBA took the unprecedented step of cutting the cash rate to a historic low of 0.1% and embarked on its first-ever quantitative easing (QE) program, purchasing over $280 billion of government bonds. (10)
This substantial monetary expansion aimed to lower funding costs and keep the exchange rate competitive. Proponents argued this intervention prevented a severe economic contraction, helping to drive the unemployment rate down to 3.5% in mid-2022. (15)
However, ultra-low interest rates and asset purchases also led to a massive surge in housing prices and record household debt-to-income ratios, leaving many households vulnerable to future rate hikes. (20)
By late 2022, compounding supply-side shocks and the depreciation of the Australian dollar led to a sharp rise in consumer price inflation. Consequently, the RBA began aggressively raising the cash rate, reaching 3.1% by December 2022. Some economists argue that if global demand slows further, currency weakness could persist, further complicating the inflation target. (25)
Explain one reason why 'the depreciation of the Australian dollar' (Extract A, line 21-22) is likely to increase domestic inflation.
