Reserve Bank of Australia Expresses Greater Concern about the Aussie Dollar than Before

November 5, 2013

For some time, Australian monetary officials have asserted that the A-dollar is more elevated than economic fundamentals justify now that the terms of trade has peaked and the burst in investment-sector mining is winding down.  The central bank’s Board meets monthly (except in January) and just issued a more urgent call for depreciation.  The Board’s statement after the October meeting had said, “The Australian dollar rose recently, but is still about 10 per cent below its level in April. A lower level of the currency than seen at present would assist in rebalancing growth in the economy.”  Now compare that to language about the exchange rate contained in this month’s statement.

The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy. [Bold added].

Discussion of economic conditions in the latest statement accentuate negative elements.  High unemployment and sub-trend GDP growth will continue for now.  Better consumer and business confidence are nascent developments and may not be sustained.  The upbeat outlook for non-mining private investment is subject to a high level of uncertainty.  Public investment will be quite weak.

Regarding inflation, officials anticipated in-target outcomes for the next one to two years. 

Bottom line is that they consider the present stance of policy to be appropriate but haven’t shut the door on further support in the future if needed.  At 2.5%, the cash rate remains at a record low and 225 basis point below its level prior to November 2011.  Starting that month and most recently in August, there have altogether been eight cuts, the largest of which was a reduction of 50 basis points in May 2012.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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