Australia’s weaker exchange rate will help accelerate the country’s return to trend economic growth and is likely to spur inflation for a period, central bank Assistant Governor Christopher Kent said.
“There were good reasons to think that the Australian dollar has for the past couple of years been on the high side of fundamentals,” Kent said in the text of a speech in Sydney today. “The bank has noted for some time that lower levels of the exchange rate, if sustained, will assist in achieving balanced growth in the economy and bring about a quicker return to trend growth. It will also add a little to inflation, for a time.” He said price gains will remain consistent with the central bank’s target.
Kent’s speech focused on the links between the country’s exchange rate and resource investment boom, as well as other drivers of the currency, and didn’t specifically address Australian monetary policy. He said the fact the Federal Reserve and Bank of Japan’s quantitative easing policies are “still playing out may have continued to provide some support to the Australian dollar beyond the time at which the terms of trade and the interest rate differential had begun to decline.”
The Reserve Bank of Australia cut the overnight cash-rate target by 2.25 percentage points between late 2011 and August to a record-low 2.5 percent to help offset the currency’s strength and spur industries outside mining. The Aussie climbed from 2009 to 2012 as the resource investment boom intensified, rendering other parts of the economy uncompetitive.
Toyota Motor Corp., General Motors Co. and Ford Motor Co. have said they’re closing plants and shedding jobs in Australia, citing high production costs and the strong currency. The nation’s unemployment rate rose to 6 percent in January, the highest level in more than 10 years.
“Prospects for growth in many other advanced economies have improved,” Kent said today, contrasting it with a slowing economy in Australia. “Accordingly, the gap between unemployment rates that had opened up earlier declined from 2011 onward.”
Kent said that in theory exchange rates should embody all relevant information about current and future demand for currencies. Even so, “there are times when the exchange rate does not move in line with what the historical behavior of fundamental determinants would otherwise imply. This suggests that a correction in the exchange rate might be in prospect.”
He said it was “somewhat surprising that the exchange rate had not depreciated earlier. However, it may have been that more tangible signs of improved prospects for growth in a number of advanced economies, particularly in the United States, helped to spur on the depreciation of the Australian dollar.”
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