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Lowe Says RBA’s Rate Cuts Helping Lift Demand, Sees QE ‘Working’

Australia’s interest-rate cuts are showing signs of boosting demand as looser monetary policy abroad helps keep the nation’s currency elevated, Reserve Bank Deputy Governor Philip Lowe said.

“Lower-than-average interest rates are providing some support to demand in the economy,” Lowe said in a speech yesterday in Sydney. “There is also some sign that they have led to a slight improvement in the property market, although there has been little change in the appetite for debt.”

Lowe focused his prepared remarks on costs and benefits that quantitative easing by major economies have on currencies and interest rates in nations such as South Korea and Canada where growth remains healthy. The U.S. Federal Reserve, European Central Bank and Bank of England have expanded their balance sheets since 2008 to try to resuscitate growth, and the Bank of Japan yesterday boosted its asset-purchase program for the second time in two months.

The local dollar rose 52 percent in the past four years, the best performer among 16 major currencies tracked by Bloomberg, as investors sought exposure to the raw materials powering China’s economic boom. The main reason for the strength is “the large shift in the relative price of commodities,” Lowe said.

The so-called Aussie bought $1.0377 yesterday in London, extending a stretch above parity with the U.S. currency that started in late-June.

Intervention Threshold

In response to questions from the audience, Lowe said that while the Reserve Bank maintains the option to intervene in currency markets to weaken the Australian dollar, such a move would require evidence that it’s fundamentally overvalued and is restraining the economy in a significant way.

The benefits of a floating exchange rate are “strong” and the threshold for intervention is “quite high,” he said, reiterating comments he made in March. There isn’t a strong case to be made that the Australian dollar at current levels is significantly overvalued, he said.

The RBA has reduced its overnight cash-rate target by 1.5 percentage points to 3.25 percent since November last year and it remains among the highest borrowing costs among major developed nations. Traders are pricing in a 59 percent chance policy makers will cut by a further quarter point at next week’s meeting, according to swaps data compiled by Bloomberg.

The elevated dollar is partly attributed to the nation’s higher returns relative to economies that have maintained low borrowings costs, Lowe said in his prepared remarks. “Portfolio flows help explain why the exchange rate has changed little since mid-year despite a general softening of the global outlook and a decline in key export prices,” he said.

Commodity Prices

Australia’s currency remained above parity with the U.S. dollar even as the price of iron ore, which made up more than 20 percent of exports last year, dropped as much as 37 percent before recovering in recent weeks.

The currency’s strength has “helped us navigate our way through a once-in-a-century investment boom,” Lowe said in the speech text. The contractionary effects of appreciation fueled by quantitative easing “can be countered with more stimulatory domestic policy setting -- including through lower interest rates -- than would otherwise have been the case,” he said.

Canada, South Korea, Switzerland, New Zealand and some of the Nordic nations are among those that have low interest rates and a high exchange rate as major central banks expanded their balance sheets, Lowe said.

QE Progress

Still, “there is evidence that this transmission channel of quantitative easing is working. Market participants report that, at least in some areas, the appetite for risk is slowly returning, with some investors looking at how to improve their returns,” he said.

Central banks in the U.S., euro area, Japan and the U.K. have expanded their balance sheets since 2008 and have assets of about $5 trillion, or about 15 percent of the combined gross domestic product of the four economies, Lowe said.

“The very low interest rates in many other economies should not be seen as a good thing or something to aspire to,” he said. “They reflect those countries’ difficult economic circumstances, and particularly the low risk-adjusted returns available on new investment.”

Lowe said while the problems in major developed nations have weighed on confidence in Australia, sentiment has also deteriorated because of weaker employment growth, asset-price gains and consumption than in the decade to the mid-2000s.

“The return to more normal patterns has come as a disappointing surprise to many who thought that the previous outcomes were the norm,” Lowe said. “This gradual realization that the future is likely to be different from the past is an important factor weighing on sentiment in Australia.”

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