During the week, I wrote about interest rates, and inflation. Australia’s inflation strategy relies heavily on one tool: higher interest rates. But as imported inflation re-emerges, it may be time to ask whether another policy lever deserves a place in the conversation. Let’s discuss exchange rate intervention.
Most Australians know how the Reserve Bank of Australia fights inflation.
When prices rise too quickly, the RBA increases interest rates. Borrowing becomes more expensive, spending slows, and inflation eventually comes back under control. For decades, this has been the foundation of Australia’s inflation-fighting framework.
But what if part of the inflation problem isn’t being caused by excessive domestic spending at all?
What if rising prices are arriving from overseas?
Australia imports a vast range of goods that households and businesses rely on every day. Fuel, vehicles, electronics, clothing, pharmaceuticals, and industrial machinery are all influenced by global prices and exchange-rate movements. Yet when inflation accelerates, policy discussions almost always focus on interest rates and rarely on the value of the Australian dollar itself. This raises an uncomfortable question:
If a growing share of inflation is imported, should exchange-rate policy play a larger role in controlling it?
Not All Inflation Is the Same
Economists divide inflation into two broad categories: tradables and non-tradables.
Tradables are goods and services exposed to international competition and global pricing. They include:
- Fuel
- Motor vehicles
- Consumer electronics
- Clothing and footwear
- Household goods
- International travel
Their prices are heavily influenced by developments in global markets and movements in the Australian dollar. Non-tradables, by contrast, are largely produced and consumed domestically. They include:
- Rent
- Childcare
- Education
- Health services
- Haircuts
- Many local services
Their prices are driven more by domestic factors such as wages, housing supply and local demand conditions. The distinction matters because different forms of inflation respond to different policy tools.
Higher interest rates can reduce domestic demand. They have far less influence over the global price of oil or the cost of imported manufactured goods.
Imported Inflation Is Rising Again
The latest data from the Australian Bureau of Statistics show:
| Tradables inflation: | 4.0% |
| Non-tradables inflation: | 4.5% |
While domestic inflation remains slightly higher, the trend tells an important story.
Tradables inflation has accelerated rapidly:
| Year | Tradables Inflation |
| September 2024 | 0.6% |
| September 2025 | 1.9% |
| September 2026 | 4.0% |
Over the same period, non-tradables inflation has remained persistently elevated in the mid-4 per cent range.
The gap between imported and domestic inflation has narrowed considerably.
Fuel illustrates the point clearly.
Automotive fuel prices rose 23.6% over the year to September 2026, making them one of the largest contributors to inflation. Australians have little influence over global oil prices. But they do experience those prices through the lens of the exchange rate. Every time the Australian dollar weakens against the US dollar, imported fuel becomes more expensive in local currency terms.
The Conventional Response
When inflation rises, central banks typically respond by increasing interest rates.
The logic is straightforward:
- Higher mortgage repayments reduce disposable income.
- Consumer spending slows.
- Business investment eases.
- Inflationary pressures gradually decline.
This framework makes sense when inflation is being driven by excessive demand within the domestic economy. But imported inflation presents a different challenge.
Higher mortgage repayments in Brisbane do not lower the global price of crude oil.
Nor do they directly reduce the cost of imported vehicles, consumer electronics or industrial equipment.
The policy works indirectly, suppressing demand across the broader economy to offset inflation originating elsewhere.
The Tool We Rarely Discuss
There is another channel through which inflation can be influenced:
The exchange rate.
A stronger Australian dollar reduces the local currency cost of imports.
All else being equal, this means:
- Cheaper fuel
- Lower prices for imported consumer goods
- Reduced costs for imported machinery and equipment
- Lower input costs for businesses that rely on imported products
In theory, a stronger currency targets tradable inflation directly. That leads to a simple question:
If imported inflation is becoming more important, why is exchange-rate policy almost entirely absent from Australia’s inflation debate?
Why the RBA Rarely Intervenes
There are good reasons Australia generally avoids managing the exchange rate.
Since the Australian dollar was floated in 1983, the Reserve Bank of Australia has viewed exchange-rate flexibility as an important economic shock absorber. A floating currency allows the economy to adapt to changing global conditions without requiring constant intervention from policymakers. The RBA still intervenes occasionally, but these operations are generally reserved for periods of market dysfunction rather than attempts to maintain a particular exchange-rate level. In fact, intervention has become far less common over time. There are also practical limitations.
Foreign exchange markets are enormous. Even central banks can struggle to influence exchange rates for extended periods. Research on Australia’s experience suggests intervention can have an effect, but often only a modest one. A stronger dollar would also create winners and losers.
Consumers would benefit from cheaper imports.
Export industries, however, could face reduced competitiveness. Sectors such as:
- Mining
- Agriculture
- Tourism
- International education
benefit from a weaker Australian dollar rather than a stronger one. There is no free lunch.
Have We Become Too Reliant on Interest Rates?
Perhaps the most interesting question is not whether foreign exchange intervention would work.
It is whether Australia’s policy framework has become so focused on interest rates that alternative tools are no longer seriously considered.
Modern economic management assigns clear roles:
- Governments manage fiscal policy.
- The RBA manages monetary policy.
- The exchange rate floats freely.
As a result, almost every inflation conversation eventually becomes a conversation about interest rates.
Yet the latest inflation figures suggest imported inflation is once again becoming a meaningful contributor to rising prices. Tradables inflation has more than doubled over the past year and now sits only marginally below non-tradables inflation.
At the very least, that should prompt a broader discussion about the available policy options.
Conclusion
The case for routine foreign exchange intervention is far from settled.
Domestic inflation remains a significant challenge, and non-tradables inflation is still running above tradables inflation. Interest rates will remain the RBA’s primary policy tool for the foreseeable future. But imported inflation is no longer a trivial part of the story.
Tradables inflation has accelerated sharply, fuel costs have surged, and exchange-rate movements continue to influence the price Australians pay for many of the goods they consume every day.
Should a country that imports so much of what it consumes rely almost exclusively on one anti-inflation tool?
The answer may ultimately be that exchange-rate intervention is ineffective, costly or economically damaging.
But as imported inflation re-emerges, it is a debate worth having.
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