If You Noticed Less RBA Jawboning Lately, Stevens Explains

  • If bank has an opinion about FX, `then we give it,' he says
  • RBA chief says helicopter money easier to start than stop

Reserve Bank of Australia Governor Glenn Stevens said his language about the currency shifts with the market, and emphasized countries should focus on boosting domestic demand rather than rely on exchange rates.

That was his response Tuesday in New York, in response to questions about why the RBA has backed off from efforts to weaken the Australian dollar, which reached a 10-month high of 78.26 U.S. cents after his remarks.

“Our language gets nuanced from time to time as the market changes,” Stevens said following a speech on the limits of global monetary policy.

The U.S. representative office at the International Monetary Fund in September expressed concern about Australian officials’ public statements “on the desired direction of the exchange rate.” The U.S. urged Australia “to avoid statements that could be perceived as inconsistent with their international commitment to a market-determined exchange rate,” according to a U.S. Treasury report released last month.

The Aussie, up more than 13 percent against the U.S. dollar from a mid-January low, is still below its 10-year average of about 88 cents.

“You don’t say the same thing when it’s 70-something as you did when it was 90-something. It would be rather odd if we did,” said Stevens. “So from time to time, the market moves it, and if we have an opinion about that, then we give it."

The Federal Reserve’s prolonged period of near-zero interest rates initially strengthened currencies such as Australia’s, only to weaken them in recent years as the U.S. central bank moved closer to tightening monetary policy. The tension sparked a rhetorical spat and led the Group of 20 economies to pledge to avoid competitive devaluations of exchange rates.

Stevens said the phrase “currency wars” is an unfortunate one.

“The very notion that we are kind of all at war with each other through this channel is pretty unhelpful, because currency changes reallocate growth. They don’t create global growth,” Stevens said. “So we need measures that work not so much through exchange rates but that can more effectively actually generate domestic demand in whichever jurisdiction, and therefore global demand."

Aussie Complication

Earlier on Tuesday in Sydney, the release of the minutes of the RBA’s April policy meeting allowed the central bank to reiterate a warning that the Aussie’s appreciation could “complicate” efforts to rebalance the economy away from mining. Stevens and his board left the cash rate unchanged at a record-low 2 percent for an 11th month on April 5, resisting a renewed wave of global easing.

Stevens didn’t comment directly on Australian monetary policy or the nation’s economic outlook in his New York speech.

“Although the speech had a medium-term focus, it also portrayed the view that the governor is a reluctant cutter,” National Australia Bank Ltd. analysts said in a research note.

The central bank chief used his address to ask whether global monetary policy is reaching the limits of its effectiveness. He cast doubt on some of the more extreme suggestions to bolster global growth and inflation, such as central banks directly financing government stimulus -- a strategy known as deploying “helicopter money” after a 1969 proposal from Nobel laureate Milton Friedman.

European Central Bank President Mario Draghi has called it a “very interesting concept” and the debate on the radical step comes after after more than 600 interest-rate cuts and $12 trillion of asset purchases have failed to spur sufficient inflation.

‘Very Complex’

The theory -- never attempted by a modern major economy -- is to fuse monetary and fiscal policies now both running out of room. Cash-strapped governments sell short-term debt straight to their central bank for newly printed money that is then injected straight into the economy via tax cuts or spending programs. The usual intermediaries, like banks, are bypassed.

“The main complication is surely that it would be a lot easier to start doing helicopter money than to stop, if history is any guide,” Stevens said in New York. “The governance requirements in doing so would be, if not intractable, at least very complex. Desperate times call for desperate measures, perhaps. Are we that desperate?”

The idea is to spur spending and investment directly rather than influence bond yields or sentiment. Central banks can be saved from permanently underwriting governments by establishing growth or inflation limits.

In a 2002 speech that earned him the nickname “Helicopter Ben,” then-Federal Reserve Governor Ben S. Bernanke said taking to the skies would “almost certainly be an effective stimulant to consumption and hence to prices.”

“Direct central bank financing of governments is frowned upon, or actually contrary to statute, in so many countries,” Stevens said in his address Tuesday. “It would be a very large step to overturn those taboos, which exist for good reason.”

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