Stevens Says 3% Rate Working, Aussie Intervention Bar High
Reserve Bank of Australia Governor Glenn Stevens endorsed the current level of interest rates and said he’d need to be confident the currency is “seriously overvalued” before considering intervention to weaken it.
“There is a good deal of interest rate stimulus in the pipeline,” he said today in semiannual testimony to a parliamentary panel in Canberra. “It is having an effect.”
The local currency and bond yields rose as Stevens said an overnight cash rate target at 3 percent is appropriate. The RBA chief reiterated that rate cuts are more likely than increases as he aims to rebalance a two-speed economy where mining regions in the north and west thrive while manufacturers, builders and retailers in the south and east struggle.
The so-called Aussie’s almost 60 percent climb in the past four years has hurt exporters. While rate settings aren’t seeking a particular exchange rate response, “they are being set with a recognition of the exchange rate’s effect on the economy,” he said.
“The other tool that may be available is, of course, intervention, and I think the truth is that the power of forces at work here, you need to be pretty confident that it’s seriously overvalued or that the market’s behaving in some quite irrational way before you would launch a large-scale intervention,” Stevens said in response to a lawmaker’s question. “It’s somewhat too high, but we’re not talking 50 percent or something like that.”
Along with the New Zealand, Canadian, Swedish and other currencies, the Aussie 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.
Two days ago, New Zealand central bank Governor Graeme Wheeler said 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. Policy makers from South Korea to the Philippines are weighing curbs to capital inflows. Norway’s central bank said it was ready to cut rates to counter the krone’s strength and Peru’s government said it’s prepared to boost dollar purchases to weaken the sol.
The RBA lowered its growth and inflation forecasts this month and has indicated a willingness to support demand in an economy where mining investment is predicted to crest this year. It reduced the benchmark rate in December to 3 percent, matching a half-century low set in 2009, as it seeks to boost industries including residential construction, before holding this month.
The central bank will alter rates if required in the months leading up to a September election, the RBA governor said.
“Stevens’ comments are very firmly focused on what a strong currency means for inflation rather than including any threat of action,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. (WBC) “The tone of his prepared comments indicate no great urgency to cut rates in the near term.”
The Australian dollar climbed for the first time in three days. It rose as much as 0.6 percent to $1.0308, before trading at $1.0288 as of 12:33 p.m. in Sydney, from $1.0245 yesterday in New York.
Yields on three-year government bonds advanced to 2.86 percent, from 2.82 percent before Stevens started his testimony. The rate is climbing for a fifth month, heading for the longest stretch of increases since August 2009.
“The economy will be adjusting to the peak of the mining boom and some other areas of demand will have room to grow more quickly than they have in recent years,” Stevens said. “This transition will not necessarily be seamless - these things seldom are - but there are reasonable prospects of it occurring over time.”
The RBA predicts a softer labor market this year as hiring demand from resource companies cools amid focus on reducing costs. Iluka Resources Ltd. (ILU), the world’s biggest zircon producer, Origin Energy Ltd. (ORG), the nation’s biggest electricity retailer, and Telstra Corp., its biggest phone company, yesterday announced a total 1,200 job cuts.
“Putting all that together, while growth was probably about trend in 2012 as a whole, our sense is that the economy has entered 2013 at a pace a little below that,” Stevens said. “We have been inclined to think that the near-term outlook could be for more of the same, but things are likely to strengthen further out.”
The RBA, in a quarterly policy statement released Feb. 8, predicted “below trend” 2013 growth of about 2.5 percent, compared with around 2.75 percent forecast in November. Consumer prices will rise 3 percent in the year to June 2013, compared with the 3.25 percent increase it had forecast three months earlier.
“The high exchange rate has lowered prices for tradable goods and services and so helped to hold down measures of inflation over the past couple of years,” Stevens said.
Investors are pricing in a 39 percent chance Stevens will reduce rates by a quarter point to 2.75 percent at the meeting next month, swaps data compiled by Bloomberg show. That would follow 175 basis points of cuts over the past 16 months.
“At least at the moment, my sense is that the appropriate interest rate for the economy’s circumstances is in fact the pretty low one we have,” Stevens said in response to questions from lawmakers. “Not because we face an emergency, but because we face other forces of a more slowly evolving nature.”
The economy is struggling under the sustained strength of the nation’s currency, which has remained above parity with the U.S. dollar for almost eight months, the longest stretch since it was freely floated in 1983. The central bank has expressed concern at the divide between the trajectories of the currency and the terms of trade, referring to a gauge of export prices relative to import prices, that tend to track each other.
The terms of trade ended last year about 17 percent lower than their record high reached in the third quarter of 2011; in contrast, the currency advanced 7.6 percent over the period.
Stevens acknowledged that companies exposed to international competition are under “acute pressure,” when discussing means available to cope with the currency. He said the local dollar is “a bit on the high side” and he’s surprised it hasn’t come down, though history suggests the market will bring it lower.
“The governor’s comments this morning imply that there is a lot of stimulus already in the pipeline and didn’t seem to be any rush there for the governor to do anything on policy anytime soon,” Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia, said in an interview with Bloomberg Television. “The currency is reacting to that. Perhaps there is a scope to see the cash rate unchanged for few months in fact.”
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