Sat, Feb 23, 2013 - Page 15 News List

Australian currency rate working: RBA governor bank

KEEPING IN CHECK:The bank’s governor said that the high exchange rate lowered prices for tradable goods and services, helping to hold down measures of inflation

Bloomberg

Reserve Bank of Australia Governor Glenn Stevens, center, arrives for the House Economics committee hearing at Parliament House in Canberra, Australia, yesterday.

Photo: Bloomberg

Reserve Bank of Australia (RBA) Governor Glenn Stevens endorsed the current level of interest rates and said he would need to be confident the currency was “seriously overvalued” before considering intervention to weaken it.

“There is a good deal of interest rate stimulus in the pipeline,” he said yesterday in semi-annual testimony to a parliamentary panel in Canberra. “It is having an effect.”

The local currency and bond yields rose as Stevens said an overnight cash rate target at 3 percent was appropriate.

Stevens — aiming to rebalance the two-speed economy where mining regions in the north and west thrive while manufacturers, builders and retailers in the south and east struggle — reiterated that rate cuts were more likely than increases.

The so-called Aussie’s almost 60 percent climb in the past four years has hurt exporters. While rate settings are not seeking a particular exchange rate response, “they are being set with a recognition of the exchange rate’s effect on the economy,” he said.

“The other tool that may be available is, of course, intervention, and I think the truth is that the power of forces at work here, you need to be pretty confident that it’s seriously overvalued or that the market’s behaving in some quite irrational way before you would launch a large-scale intervention,” Stevens said in response to a lawmaker’s question.

“It’s somewhat too high, but we’re not talking 50 percent or something like that,” he added.

The Australian central bank lowered its growth and inflation forecasts this month and has indicated a willingness to support demand in an economy where mining investment is predicted to crest this year. It reduced the benchmark rate in December last year to 3 percent, matching a half-century low set in 2009, as it seeks to boost industries including residential construction, before holding this month.

“Stevens’ comments are very firmly focused on what a strong currency means for inflation rather than including any threat of action,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. “The tone of his prepared comments indicate no great urgency to cut rates in the near term.”

The Australian dollar climbed for the first time in three days. The Australian dollar rose 0.7 percent to US$1.0314 as of 4:49pm yesterday in Sydney. It gained 0.1 percent since Feb. 15, when it completed a five-week decline, the longest streak since June last year.

The currency’s strength is slowing parts of the economy and forecast inflation.

The RBA, in a quarterly policy statement released on Feb. 8, predicted “below trend” growth of about 2.5 percent this year, compared with around 2.75 percent forecast in November last year. Consumer prices will rise 3 percent in the year to June this year, compared with the 3.25 percent increase it had forecast three months earlier.

“The high exchange rate has lowered prices for tradable goods and services and so helped to hold down measures of inflation over the past couple of years,” Stevens said.

Investors are pricing in a 39 percent chance Stevens will reduce rates by a quarter point to 2.75 percent at the meeting next month, swaps data compiled by Bloomberg show.

That would follow 175 basis points of cuts over the past 16 months.

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