The Reserve Bank of Australia (RBA) is positioning itself to raise the official cash rate in the coming months if domestic inflationary pressures persist, according to its latest minutes.
An RBA Board member, Sarah Jenkins, stated that elevating borrowing costs will become vital if consumption growth bubbles over and household leverage ratio rises further. Currently, with the cash rate at 1.0% and underlying inflation near the lower bound of the target band, the central bank maintains an expansionary stance.
However, the recent appreciation of the Australian Dollar (AUD), driven by strong global demand for mineral exports, is expected to temper some inflationary heat. The RBA Governor noted that "the stronger exchange rate will act as a drag on export competitiveness, suppressing the recovery in non-export-oriented sectors."
Jenkins added, "The appreciation of the AUD will likely peak early next year, which will provide a temporary disinflationary impulse through cheaper imports. However, as these exchange rate effects subside, underlying domestic capacity pressures will demand policy tightening."
With reference to Extract A, explain the likely effect of a rise in the value of the Australian dollar (AUD) on aggregate demand.
