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US Fed hikes could lift Australian economy

AAP logoAAP 15/12/2016 Stuart Condie

The US Federal Reserve's signal of faster-than-expected rate rises in 2017 could be good news for the Australian economy.

The Australian dollar dropped by almost a cent against the US dollar on Thursday after the US Fed raised its central rate by a quarter of a percentage point and indicated there could be more cuts to come than previously anticipated.

"The main relevance of the US rate hike is that it helps keep the $A down," AMP chief economist Shane Oliver said.

"This is essential if Australia is to continue rebalancing its economy as mining investment continues to unwind and the housing construction cycle peaks in 2017."

That weaker Australian dollar boosts exports by making them cheaper for overseas buyers.

Dr Oliver said he expects the Australian dollar - which has been as high as 78 US cents this year - to fall below 70 in 2017.

At 1200 AEDT on Thursday, it was at 74.04 US cents, having been 74.89 at 1700 AEDT on Wednesday.

And rising rates in the US don't necessarily mean trouble for Australian homeowners, with the state of the broader economy placing the Reserve Bank of Australia under no pressure to follow suit.

The local economy is in a relatively weaker position compared to the US and inflation is still running below target.

Dr Oliver is among those economists still tipping a further cut to the cash rate over the next 12 months, while Merrill Lynch economist and rates strategist Tony Morriss expects the RBA to hold.

And Mr Morriss said the impact of Friday's hike by the Fed - its first in a year and only its second in a decade - on the cost of funds had already been priced in by Australia's big banks.

Commonwealth Bank, Westpac, ANZ and National Australia Bank have all cited funding costs while raising rates on some of their mortgages over the past few weeks.

"In terms of where bank borrowing would be impacted, I think this would probably sanction some of the recent moves higher in fixed-term rates rather than signalling that those short-term fixed rates would be rising much further," Mr Morriss said.

Besides, a signal that three rate rises should be expected in 2017 is not the same as a guarantee.

This time last year, policymakers flagged four interest rate rises for 2016, depending on global events, and ended up delivering just one.

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