Last Hawk Stevens Faces Currency War Fallout in New TermMichael Heath
Reserve Bank of Australia Governor Glenn Stevens’s reappointment pits the inflation-focused central banker against counterparts using near-zero interest rates and quantitative easing to drive down their currencies.
While Stevens has reduced the key rate to match a 53-year low of 3 percent, Australia’s dollar remains resilient as the yield gap with the U.S., Europe and Japan lures investors. In contrast with Switzerland, which has capped its currency, and New Zealand, which is considering lending curbs to dampen home prices, Stevens has stuck with the cash rate as his main tool.
“Stevens’s biggest challenge is a currency that’s damaging his economy,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “He’s one of the last hawks. But he’s able to remain one because he’s in the enviable position of having an economy that’s grown for 21 years and isn’t having to resort to desperate measures to keep it alive.”
Stevens, whose term was extended by three years yesterday by Treasurer Wayne Swan, has grappled with a currency that averaged 39 percent higher in the past two years than in the prior decade. That’s bankrupting manufacturers unable to compete with cheap imports, discouraging international tourists as prices rise, and weakening retailers as consumers spend online.
The 55-year-old governor and his board reduced the benchmark rate by 1.75 percentage points in six steps in the 14 months through December before pausing this year. While the policy stance isn’t seeking a particular exchange rate response, it is “being set with a recognition of the exchange rate’s effect on the economy,” Stevens told a parliamentary panel in February.
“The other tool that may be available is, of course, intervention,” he said Feb. 22. “I think the truth is that, with the power of the forces at work here, you would need to be pretty confident that it is seriously overvalued or that the market is behaving in some quite irrational way before you would launch on large-scale intervention.”
Pressure from the exchange rate has exacerbated divisions in an economy where resource-rich regions in the north and west boomed on the biggest mining investment expansion in more than a century, while the south and east dominated by manufacturing and construction stagnated.
Stevens’s other major challenge is managing the crest in resource investment that the RBA predicts will occur this year. In addition to offsetting the impact of the currency, lower rates aim to spur industries such as building, which employs almost four times as many workers as mining.
“If the currency stays high and growth remains a little bit sub-trend, do you keep cutting interest rates to support the economy?” asked Peter Jolly, Sydney-based head of market research for National Australia Bank Ltd. “I think that will be a big challenge for monetary policy making over the next few years, how you manage the economy through that.”
Jolly noted that some central banks concerned about the impact of an extended period of low rates are considering macro-prudential tools to target borrowing and prevent bubbles.
Across the Tasman, New Zealand’s Governor Graeme Wheeler is considering lending restrictions to curb rising house prices as that nation’s surging currency rules out rate rises.
Wheeler, a former managing director of the World Bank who returned to his homeland in September to take the reins at the RBNZ, said on March 14 the central bank is working “quite fast on the macro-prudential instruments.” The “last thing” New Zealand needs is “a housing price bubble,” he said after keeping the benchmark rate unchanged at a record-low 2.5 percent.
New Zealand’s changing of the guard is part of a global trend of turnover among central bank chiefs. That began with the arrival in November 2011 of Mario Draghi at the European Central Bank, Canada’s Mark Carney at the Bank of England and the Bank of Japan’s new governor Haruhiko Kuroda. The shift could culminate a year from now if Federal Reserve Chairman Ben S. Bernanke is succeeded by someone even bolder.
Swan, announcing Stevens’s three-year extension, described the governor as “one of the best” policy makers in the world and said he has made an “enormous contribution” to Australia’s economic performance.
Australian sovereign debt gained 54 percent since Stevens became governor in September 2006, the most after New Zealand among developed nations. The so-called Aussie dollar climbed against all 16 major peers in the period and was the best performer against the greenback, surging 39 percent.
The announcement extended Australia’s tradition of keeping the central bank chief in-house, with only one governor named from outside since it was founded in 1960. The three-year term also clears the path for Deputy Governor Philip Lowe, who was appointed the No. 2 official in February 2012, giving him time to prepare for succession in 2016. Stevens served for five years as deputy to Ian Macfarlane before taking over from him in 2006.
It also prevents a central bank succession debate becoming a political issue ahead of elections due Sept. 14, three days before the governor’s current term is due to expire.
“The reappointment effectively defuses a potentially volatile political issue,” said Norman Abjorensen, a political analyst at the Australian National University in Canberra and author of “Australia: The State of Democracy.” “Leaving the reappointment open, given the timing of the election and the end of Stevens’s contract, would have unnecessarily politicized both the bank and the appointment. Business demands certainty and it’s got it with this decision.”