Debelle Says RBA Retains Scope to Cut Rates to Offset Aussie
“We have been able to counter the effects of the higher Australian dollar with lower interest rates,” Debelle, who oversees financial markets, said in a speech in the southern city of Adelaide today. “We still obviously retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.”
When asked about the conditions needed to provoke the Reserve Bank of Australia to intervene in markets to weaken the local dollar, Debelle said conventional monetary policy was not “exhausted.” The RBA has lowered its overnight cash rate target by 1.75 percentage points in the past 16 months to 3 percent, matching a half-century low reached in 2009.
“Jawboning and rate cuts are the RBA’s weapons of choice when it comes to talking down the somewhat overvalued currency,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “The RBA is reluctant to intervene in the currency because it believes the market is more efficient at setting the exchange rate.”
The Australian dollar, together with the New Zealand, Canadian, Swedish and other currencies, has strengthened as nations such as the U.S., Japan and the U.K. reduce rates to near-zero and undertake quantitative easing to boost their economies.
“While it may be the case that the monetary policy settings we see at the moment might be good for the global economy as a whole, they may not be beneficial for every country,” Debelle said. “The Australian dollar is somewhat on the high side.”
The Australian currency traded at $1.0265 at 10:44 a.m. in Sydney, from $1.0277 before Debelle’s speech, extending its longest stretch above parity with the U.S. dollar since it was freely floated in 1983.
Asked about the circumstances necessary to provoke the RBA to intervene or cap the nation’s currency, Debelle said: “It’s probably higher than where we are now.” He said the RBA has room to move on rates unavailable to some other central banks.
“If the exchange rate continues to have a contractionary effect on the economy, we still have some scope to offset it with regular conventional monetary policy. So that’s not exhausted,” he said.
Debelle acknowledged that in the second half of last year the RBA sold Australian dollars to an offshore customer and opted to retain the foreign currency.
“If we had sold the foreign exchange in the market, we would have been buying back Australian dollars putting further upward pressure on the Australian dollar at the margin, which we didn’t think was appropriate given our assessment was that the currency was already somewhat on the high side,” he said.
The RBA’s sales of its own currency outside foreign- exchange markets rose to a three-year high last year as it sold A$1.4 billion ($1.44 billion) more than it bought in the three months to October to a category of buyers that can include foreign central banks.
That was the largest amount since the period ended July 2009, official data showed. It purchased Aussie dollars in the market in 2008 as the domestic currency fell toward a five-year low versus the greenback as equity markets slid after the collapse of Lehman Brothers Holdings Inc. The Aussie has climbed 46 percent since the end of 2008, the biggest gainer among more than 150 currencies tracked by Bloomberg.
Debelle said today the central bank holds A$36 billion in reserves: 45 percent are held in U.S. dollars, 45 percent in euros, and the remainder split between yen and Canadian dollars.
“Some of the reserves are held to fund Australia’s potential commitments to global financial institutions such as the International Monetary Fund,” Debelle said. “But the primary motivation is to provide the capacity for the bank to intervene in the foreign exchange market when necessary. Over the past two decades, we have, on occasion, intervened to facilitate an orderly depreciation of the Australian dollar, when conditions in the market warranted.”
Responding to a question on the RBA’s holdings, Debelle said it was conceivable the RBA would hold the Chinese currency as part of its reserves in the future.
New Zealand central bank Governor Graeme Wheeler said last week the monetary authority is prepared to step in to smooth peaks in the nation’s currency, even as he recognized that it would be unable to determine the kiwi’s level.
Wheeler said Feb. 20 the bank is exploring the use of macro-prudential tools to support monetary policy as it tries to arrest an increase in house prices.
Debelle said today “there are large uncertainties about how effective such tools really are.”
Debelle said the RBA’s board considers that the so-called Aussie “is exerting a contractionary effect on the economy, and to offset that effect they’ve lowered interest rates” to spur growth.
“In the normal state of affairs, lowering interest rates tends to also lower the exchange rate,” Debelle said. “That obviously hasn’t happened over the past six or nine months. The exchange rate is still basically where it was before we commenced the most recent easing cycle. So that sort of transmission channel of monetary policy isn’t working the way it normally does. But others still are.”
Borrowing rates in Australia are “basically as low as they’ve ever been” for businesses and for mortgages, just a little bit higher than where they got to in 2009, Debelle said.
“So those transmission channels of monetary policy are still very much working, the Reserve Bank’s ability to set the cash rate and influence that structure of interest rates in the economy is still very much there,” he said.