Neutral Rate Talk Doesn't Mean Tighter Policy Is Coming, RBA's Debelle Says

  • Australia doesn’t have to hike rates in line with global peers
  • Aussie currency tumbles as deputy governor speaks in Adelaide

RBA Speeches Put Australian Dollar in Focus

The Australian central bank’s No. 2 official said the board’s discussion of the level of the neutral interest rate at its July policy meeting shouldn’t be interpreted as a signal of plans to tighten policy.

Since Australia’s cash rate didn’t fall as low as those of global counterparts, the RBA doesn’t automatically have to follow suit now that peers have begun tightening, Reserve Bank Deputy Governor Guy Debelle said in a speech in Adelaide on Friday. His comments helped to drive the currency lower after it soared to a two-year high this week.

In response to a question from an audience member, Debelle reiterated that an appreciating exchange rate “isn’t helpful” and a lower exchange rate would be “more helpful” in the current conditions.

“Given the adjustment we’ve been going through over the last few years, off the resource investment boom, we’ve said repeatedly that an appreciating exchange rate would complicate that,” he said. “So the exchange rate is appreciating, it’s complicating that adjustment.”

Setting out the RBA was under no obligation to follow global counterparts in tightening, Debelle noted in his speech that the policy rates in both the U.S. and Canada still remain below that in Australia. 

Aussie Moves

“In Australia, as is the case elsewhere, policy rates are set at the level assessed to be appropriate to achieve the domestic policy objectives,” he said. “While global influences, including monetary policy settings in other economies, have a significant impact on that assessment, they are, in the end, only one of a number of considerations.”

Just three days ago, the Australian dollar soared when the RBA said in minutes of this month’s meeting that a discussion was held on the neutral cash rate, and its level was estimated at about 3.5 percent, two percentage points above the current record-low. Traders appeared to extrapolate from the figure that a discussion on raising rates had begun.

“No significance should be read into the fact the neutral rate was discussed at this particular meeting,” Debelle said. “Most meetings, the board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate.”

The Aussie declined 0.7 percent to 79.03 U.S. cents at 3:30 p.m. in Sydney, with the bulk of those losses coming in the wake of Debelle’s comments. The yield on three-year Australian government notes slipped six basis points to 2.03 percent.

Debelle’s speech covered the four factors -- the subdued global recovery, low investment, weak wages growth despite low unemployment, and low inflation -- that explain the “very stimulatory” policy settings worldwide at the moment. He discussed each one and the prospects for breaking out of them.

Financial Impact

He said part of the reason for Australia’s lower neutral rate is that the bank estimates the long-run potential growth rate of the economy has declined by around half a percentage point from the mid-1990s.

He also explained that because monetary policy settings are more expansionary in the rest of the world than in Australia, both through lower policy rates and balance sheet expansion, this puts “upward pressure” on the Australian dollar.

“So, while an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the Australian economy, an appreciating exchange rate works against this,” he said.

Debelle also said “it is conceivable” that unconventional monetary policy may have a larger financial impact than movements in interest rates. “The expansionary settings of monetary policy globally clearly have had a material influence on domestic policy settings through the impact of capital flows on the exchange rate,” he said.

The effects of these global influences on the Australian economy “have been material,” he said. The global economic environment and global policy settings that have been in place for the past decade have “contributed significantly” to the monetary policy settings in Australia that we have today and will likely continue to do so for the foreseeable future.

But he also allowed the RBA some room for its own action.

“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase,” he said.

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