Australia Needed to Cut Rates to Avoid Currency Jump, OECD Saysby
Can’t run policy ‘as though there’s no other rates’ in world
Excess capacity keeping global inflation, growth rates low
Australia’s interest-rate cut Tuesday was necessary to stop yield-hungry investors driving up the currency any further, according to a top official at the Organisation for Economic Co-operation and Development.
“You can’t run monetary policy as though there’s no other rates in the world economy,” said Adrian Blundell-Wignall, a special adviser to the secretary-general of the OECD and former Reserve Bank of Australia official. “When yields have been driven down to zero or negative numbers, then if you’ve got your head too far above the parapet, you’ll become the subject of financial interest.”
RBA Governor Glenn Stevens cut the cash rate to a record-low 1.5 percent Tuesday, leaving his deputy and successor, Philip Lowe, with an inheritance that’s confounding counterparts worldwide: very low inflation and limited policy ammunition to combat it. The problem facing policy makers, according to Blundell-Wignall, is excess capacity pushing down inflation and proving “a big headwind” to economic growth.
The world’s more open economies are “batting up against a set of economies which are more closed, and they’ve gotten very big,” he told reporters after a speech in Sydney Wednesday. “Excess capacity means there’s too many goods coming out of emerging markets and too many impacts on wages and other things that really affect what’s happening in western countries.”
The central bank is trying to navigate the end of a once-in-a-century mining investment boom by relying on services like tourism and education to pick up some slack. But while Australia’s economy has grown faster than the central bank predicted, core inflation and wage growth are both at record lows, and the Aussie has rebounded about 10 percent from its mid-January trough.
The best result for Australia would be a depreciation in the exchange rate. But with rates low and even negative across the developed world, the most it can achieve at the moment is getting the currency to hold its ground.
“Historically, even with a floating exchange rate which says you can have independent monetary policy, you can’t be totally impervious to what markets are doing and what they’re searching for,” Blundell-Wignall said.
The swaps market was pricing in about a one-in-two chance of another rate cut this year as of 4 p.m. on Wednesday in Sydney, according to data compiled by Bloomberg. JPMorgan Chase & Co., Morgan Stanley and Macquarie Bank Ltd. anticipate a cash rate of 1 percent in the second quarter of next year.
Blundell-Wignall lauded Australia’s floating exchange rate and policy makers’ readiness to let it “really move by huge amounts” of up to 50 percent over several years without interference.
“I don’t think the Reserve Bank has ever targeted the exchange rate, which involves intervention as well as monetary policy,” he said. “We don’t do that, and that’s to our credit. And countries that do do that get themselves into really big trouble.”