Lowe Says Intervention Bar ‘Quite High’ on Aussie Dollar

RBA Deputy Governor Philip Lowe
Reserve Bank of Australia Deputy Governor Philip Lowe. Photographer: Photographer: Ian Waldie/Bloomberg

The Australian central bank’s threshold for intervening to temper gains in the local dollar is “quite high” as officials monitor the impact of a stronger currency on the labor market, Deputy Governor Philip Lowe said.

“It’s difficult to make a strong case that the exchange rate is fundamentally misaligned,” Lowe said in response to a question from the audience after a speech today in Sydney, citing the nation’s solid economy. “That makes the hurdle for intervention quite high.”

The Australian dollar, the best performer in the past six months among Group of 10 currencies, has remained elevated as the Reserve Bank of Australia maintains the highest benchmark rate of major developed economies and a once-in-a-century mining investment boom draws investors. Lowe said the local dollar’s gains reflect the nation’s very high terms of trade, a measure of export prices relative to import prices.

“It is possible for exchange rates to overshoot,” Lowe said in his prepared remarks. “While the evidence of the past 30 years is that movements in the exchange rate have been an important stabilizing force for the Australian economy, the unusual nature of the current forces means that we need to watch things closely.”

The currency was little changed at $1.0550 at 10:15 a.m. today in Sydney, near a six-week low against the dollar. The so-called Aussie fell as low as $1.0525 yesterday, its weakest level since Jan. 26.

The RBA yesterday held its benchmark rate at 4.25 percent for a second month, while noting it has scope to lower borrowing costs as Europe remains a potential source of shocks “for some time yet.”

‘Contractionary Effect’

A persistent increase in the unemployment rate “might suggest that the contractionary effect of the high exchange rate was more than offsetting the expansionary effect of the investment boom and the terms of trade,” Lowe told the Australian Industry Group. “If this were to turn out to be the case, monetary policy would have the flexibility to respond provided the inflation outlook remained benign.”

“On the evidence to date, something like the current combination of exchange rates and interest rates appears to be what is needed to maintain overall macroeconomic stability,” Lowe told the AIG, whose members include manufacturers hurt by the currency. “The high exchange rate and the high interest rates relative to the rest of the world are both being driven by the fact that Australia is a major beneficiary of the change in world relative prices.”

China, India

Australia’s economy is propelled by a mining boom predicted to last decades as the urbanization of hundreds of millions of people in China and India drives demand for iron ore, liquefied natural gas and coal. The RBA’s decision to pause its benchmark rate at 4.25 percent for a second meeting yesterday, after two reductions late last year, reflects confidence domestic employment will be supported by A$456 billion ($481 billion) of resource projects to meet Chinese demand.

“Over the next few years, mining-sector investment will reach new highs as a share of gross domestic product, and is likely to account for around 40 percent of total business investment,” Lowe said. “Structural change is also clearly evident in the export numbers, with resources now accounting for around 60 percent of total exports, up from 35 percent a decade ago.”

Employment in Australia stalled last year as the currency’s climb hurt non-resource companies and house prices slumped by a record 4.8 percent.

‘Little Choice’

“Inevitably, the high exchange rate means that the manufacturing industry has little choice but to move up the value-added chain in order to compete,” Lowe said. “Realistically, Australia cannot hope to be a large-scale producer of relatively standardized, plain-vanilla, manufactured goods for the world market. But what we can be is a supplier of manufactured goods that build on our comparative advantages.”

The job market has shown signs of revival this year as employers added the most workers in 14 months in January and the unemployment rate unexpectedly declined to 5.1 percent.

“I don’t think they sense that they have a real ability to control the exchange rate,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. “They wouldn’t be confident of intervention having much impact. In which case, he’s really saying, if it persists they’ll just have to lower interest rates.”

European stocks declined yesterday, with the Stoxx Europe 600 Index dropping the most since November, as a report confirmed a contraction in the euro-area economy and investors weighed Greece’s chances of getting bondholders to accept a debt swap.

“In Europe we’re going to see these two steps forward, one step back,” Lowe said in response to an audience question. “I think what we’ve seen last night is probably one step back.”


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