The Real Effective Exchange Rate (REER) rarely makes headlines, but its influence is far-reaching—affecting everything from the cost of imported goods to Australia’s trade competitiveness. In a year marked by shifting global markets and new Reserve Bank of Australia (RBA) policies, understanding REER isn’t just for economists. It’s essential for anyone looking to make smarter financial decisions in 2025.
Understanding REER: More Than Just a Currency Metric
At its core, the REER measures the value of the Australian dollar against a basket of other currencies, adjusted for inflation differences. Unlike the nominal exchange rate, which tells you how many US dollars you get for an Aussie dollar, the REER tells you how competitive Australia is on the world stage after accounting for price changes at home and abroad.
- Formula: The REER is calculated by weighing Australia’s bilateral exchange rates with key trading partners and adjusting for relative inflation rates.
- Why it matters: If Australia’s REER rises, local goods become more expensive to foreign buyers, potentially hurting exports. If it falls, our exports get a boost, but imports become pricier.
In 2025, with inflation still above the RBA’s 2–3% target band and global supply chains recalibrating, the REER is under renewed scrutiny from policymakers and business leaders alike.
REER’s Ripple Effects: From the Supermarket to the Sharemarket
The REER isn’t just an abstract number; it shapes everyday Australian life in real, tangible ways. Here’s how:
- Imported Goods: A higher REER means the Aussie dollar is strong, making imported electronics, cars, and overseas holidays cheaper. But if the REER falls—as it did during the 2023–2024 global volatility—shoppers feel the pinch at the checkout.
- Exporters: Companies selling minerals, agricultural goods, and education services watch the REER closely. For example, in early 2025, a modest decline in the REER improved profit margins for Australian wheat exporters competing with US and Canadian producers.
- Inflation: The RBA’s 2025 monetary policy statements have flagged the REER as a key risk factor for imported inflation. A weaker REER means higher costs for businesses reliant on overseas inputs, which can push up local prices.
For investors, understanding REER trends can be a tactical advantage. In 2025, sectors like mining and tourism are especially sensitive to currency competitiveness, making REER a useful metric for portfolio decisions.
2025 Policy Shifts and the REER Outlook
This year, the RBA has adopted a more transparent communication strategy, frequently referencing REER in its policy briefings. The May 2025 Financial Stability Review highlighted the following developments:
- RBA Rate Adjustments: With the cash rate steadying at 4.35%, the RBA aims to stabilise inflation without driving the REER excessively higher—a delicate balancing act.
- Trade Policy: Australia’s new trade agreements with Southeast Asian partners have shifted the weighting of currencies in the REER calculation, boosting the influence of the Indonesian rupiah and Vietnamese dong.
- Commodity Prices: Continued demand for lithium and rare earths has kept the Australian dollar relatively resilient, but global uncertainty means the REER remains volatile.
For businesses and households, this means ongoing uncertainty around the cost of imported goods, the competitiveness of exports, and the direction of inflation in the second half of 2025.
How to Factor REER into Your Financial Decisions
Whether you’re running a business, investing, or just budgeting for the year ahead, keeping an eye on the REER can help you anticipate shifts in costs and opportunities:
- Business Owners: Monitor REER trends if your supply chain or customer base is international—adjust pricing and sourcing strategies accordingly.
- Investors: Look for sectors or companies with exposure to currency fluctuations. Export-heavy stocks may benefit from a lower REER, while importers prefer a higher REER.
- Consumers: If the REER drops, consider bringing forward major overseas purchases or travel before prices rise.
With economic uncertainty lingering, the REER is a vital metric for anyone wanting to stay ahead in 2025’s financial landscape.
