RBA’s Stevens Sees Disruption Likelihood on Fed Rate Rise

Reserve Bank of Australia Governor Glenn Stevens said he sees the “likelihood of some disruption in markets” when the U.S. Federal Reserve raises interest rates.

Stevens, in an interview published on The Australian newspaper’s website today, also said “it’s been a little early actually for people to be contemplating early rises in rates.”

“The likelihood of some disruption in markets is probably pretty high because it always is when the Fed eventually changes course,” Stevens told the newspaper. “That will be the case even though they will be very careful and measured and signal and so on, as they’re doing.”

The Australian dollar -- which traded as high as about $1.11 and as low as 77 U.S. cents in the past five years -- has remained above 90 cents since March even as the price of some of the nation’s key commodity exports declined. The elevated currency has impeded the RBA’s efforts to stimulate non-mining areas of the economy with record-low interest rates.

Stevens said it is difficult to see how most standard metrics would “have the Aussie dollar quite this high.”

‘Maybe Underestimating’

“That’s why we’ve said that our sense is that some of the investors are maybe underestimating the probability of a material decline at some point, but I can’t say when that might be,” Stevens said. He said that by all accounts, the Fed starting to head in the direction of normalization will “be seriously in prospect” in a year from now.

The RBA kept its benchmark rate at 2.5 percent for an 11th month on July 1 and flagged a period of steady borrowing costs. Traders are pricing 15 basis points of cuts over the next 12 months, according to an index of swaps from Credit Suisse Group AG.

The minutes of the policy-making U.S. Federal Open Market Committee’s June meeting offered no new clues on the timing of an interest-rate increase, with officials saying policy depends most “on the evolution of the economic outlook.” The federal funds rate, which represents the cost of overnight money in the interbank market, has been held near zero since December 2008.

The Australian dollar has gained about 7 percent since the RBA moved to a neutral bias in February this year. It ended the week at 93.92 U.S. cents, up 0.3 percent since July 4.

Potential Problems

“Most people who are looking for potential problems for us I think will be more likely to think about China than the U.S., at least over the next twelve months,” Stevens said. “I happen to think China’s probably okay too.”

Stevens, who expressed a preference for a weaker currency in late 2013, resumed such commentary last week.

“Most measurements would say it is overvalued, and not just by a few cents,” he said in a July 3 speech in Hobart.

Consumer confidence in May fell to its lowest level since August 2011 and has remained subdued since then after the Australian government’s budget flagged spending cuts and a new tax on high-income earners. Even still, Stevens expressed optimism low borrowing costs will underpin activity.

“I think that the current level of rates will be supporting demand for quite some time yet,” Stevens said. “I doubt that we’ve seen all the effects. We’ve certainly seen a goodly portion of them. I think that’s clear, but I doubt that the full impact on the level of spending is yet here.”

Non-Mining Growth

Loose monetary policy has boosted household spending. Home prices (RPAUMED) rebounded 1.4 percent in June after slipping 1.9 percent in May, according to RP Data-Rismark’s Home Value Index report.

“I would welcome an outcome in which price rises are unremarkable in either direction for some time ahead,” Stevens said.

Australia can weather a slump in mining investment as low interest rates and infrastructure spending spur other industries, according to economist and RBA board member John Edwards. Replacing 2 percent to 3 percent of gross domestic product with non-mining sources of growth over five to six years will be “onerous but not difficult,” he wrote in a paper for the Lowy Institute last month titled “Beyond the Boom.”

“Our message has never been that we’re all going to be ruined by the ending of the mining boom,” Stevens said. “Our message is that it was a considerable challenge to manage. We’ve managed significant parts of it already, I think quite well. I think we can manage the next phase as well, quite effectively, but the truth is there’s legitimate uncertainty about how smooth that will be at this point in time and really, that’s inevitable.”

To contact the reporters on this story: Malcolm Scott in Sydney at mscott23@bloomberg.net; Kevin Costelloe in Washington at kcostelloe@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Iain McDonald, Benjamin Purvis

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.