Australia’s central bank Governor Glenn Stevens said the board has maintained an “open mind” on whether it needs to cut interest rates further as it sees signs low borrowing costs are supporting spending.
“Because inflation has been consistent with the target, the board has been quite comfortable in easing policy by a significant amount,” Stevens said in remarks to a parliamentary panel in Canberra. “The board has maintained an open mind about whether we may need to lower interest rates further. At this point, however, there are few serious claims that the cost of borrowing per se is holding back growth.”
The currency rose as Stevens said looser monetary policy is supporting the economy. Markets and economists predict the Reserve Bank of Australia will leave rates unchanged in the near term. Low borrowing costs are driving up home prices, suggesting the RBA may be reluctant to add to its 2.25 percentage points of rate cuts since late 2011.
“Interest rates are very low now,” Stevens said in response to questions from lawmakers. “I’m not saying that we’re not prepared to lower them further. If it’s sensible and required to do that we will.”
Australia’s dollar has dropped about 12 percent this year, the steepest decline after the yen among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes. The Aussie traded at 89.20 U.S. cents at 11:07 a.m. in Sydney.
Stevens said the local dollar has “behaved, of late, more as might be expected,” reiterating that balanced growth in the economy would probably require a lower exchange rate.
“My judgment would be that an exchange rate over a dollar or even in the 90s is unlikely to be a sustainable equilibrium for us over time,” Stevens said.
The governor said the floating exchange rate has served Australia “very well” and he expects it will continue to do so. On the issue of intervention, Stevens said it can be a useful thing if used judiciously.
“It’s no use to you really if you’re fighting strong fundamentals,” he said. “While I’ve thought about intervention more than once through the past several years, we’ve by and large eschewed it to date.”
Stevens said he wasn’t ruling out intervention in future.
“I don’t really want to try to set out in advance though, specific triggers that might induce us to do intervention,” he said. “If it seemed to be appropriate, in the market conditions, and taking account of the fundamentals as best we can judge them, to do so, then we’d do so. But I don’t want to signal any plan in advance. So I think I’ll remain slightly ambiguous.”
The governor delivered his testimony on the same day the Federal Reserve will announce its policy decision as prospects build the U.S. will trim its $85 billion in monthly asset purchases.
“There is ample potential for this shift in direction to reverberate around global markets,” Stevens’ said of tapering.
The Aussie climbed almost 50 percent in the four years ended Dec. 31, 2012, as the nation escaped the 2009 global recession and the China-led commodities-investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses.
General Motors Co.’s Holden unit said last week it will cease making cars in Australia in 2017, with about 2,900 employees set to lose their jobs at the automaker’s plants in South Australia and Victoria. Coming after Ford Motor Co.’s May announcement that it will exit in 2016, GM’s decision raises risks to the sustainability of the supply chain for the third carmaker in Australia, Toyota Motor Corp.
Australia’s economy expanded slower than economists forecast last quarter after households boosted savings. Third-quarter gross domestic product advanced 0.6 percent from the prior three months, when it rose a revised 0.7 percent, government data showed Dec. 4.
“Our expectation is that the below-trend growth in GDP we have seen for a while now will probably continue for a bit longer yet,” Stevens said. “Over the more medium term, there are good grounds to think that growth can strengthen.”
Stevens has signaled a weaker Aussie is preferable over lower interest rates to help spur the economy.
In an interview published in the Australian Financial Review Dec. 13, the governor said a level of 85 U.S. cents “would be closer to the mark than 95 cents.”
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