IMF Sees Aussie 10% Overvalued as RBA Cash Rate Appropriate
Australia’s central bank should maintain easy policy settings as a mining-investment slowdown and a local currency about 10 percent overvalued drag on economic growth, the International Monetary Fund said.
“With growth currently on the soft side, the real exchange rate still overvalued and weighing on the non-mining sector, and inflation within the target range, monetary policy should remain accommodative,” the IMF said in a preliminary statement after reviewing the nation’s economy.
While the Reserve Bank of Australia “has done a lot” with 225 basis points of rate cuts since late 2011, it can’t engineer a depreciation of the currency, Brian Aitken, IMF mission chief, Asia and the Pacific Department, said in response to questions in Sydney yesterday. With the benchmark interest rate at a record-low 2.5 percent, the RBA still has room to respond if the growth outlook worsens, he said.
Australian policy makers are balancing a high currency, which is weighing on industries such as manufacturing, against rising home prices. Governor Glenn Stevens and his board said there was “mounting evidence” interest-rate cuts were working, even as it retained the option of loosening policy to support growth in an economy battling an “uncomfortably high” currency, minutes of this month’s meeting released Nov. 19 showed.
Australia’s currency climbed almost 50 percent in the four years ended Dec. 31 as the nation escaped the 2009 global recession and a China-led commodities-investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses at companies including Ford Motor Co., which said in May it would end production in the country after nine decades.
The Australian dollar traded at 93.31 U.S. cents at 9:42 a.m. in Sydney. It’s more than 20 percent higher than its 20-year average even after dropping 10 percent this year.
The Aussie “still looks overvalued by around 10 percent,” the IMF said in the statement, which was issued at the conclusion of an Article IV consultation with government agencies, the central bank and other regulators, business leaders and trade unions.
The “key external factor” that may help the Australian dollar weaken would be a Federal Reserve decision to begin tapering its bond purchase program, Aitken said.
Speculation Fed Chairman Ben S. Bernanke would slow bond purchases helped push Treasury yields higher and saw Australia’s dollar weaken in the four months through August. The Fed’s decision in September to refrain from slowing its buying surprised investors who had forecast the first tapering of the program, spurring a rally in the Aussie.
Fed officials said they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting released in Washington yesterday showed.
Australia’s growth will remain “below trend” at 2.5 percent this year and rise to its trend rate of around 3 percent by 2016, the IMF said.
“Cuts to interest rates since the end of 2011 have shown signs of generating some revival in interest-sensitive spending and could support housing investment going forward,” the IMF said in the statement. “But the soft labor market, excess capacity in the non-mining sector holding back investment plans, and the strong Australian dollar” will be headwinds.
The Aussie dollar is about 6 percent overvalued at present, based on models the RBA is likely to employ, UBS AG estimated in a report last week. The central bank this month forecast below-trend growth and rising unemployment in 2014, with prices held in check as wage growth remains subdued.
The Organization for Economic Cooperation and Development this week projected Australia’s economy will expand 2.5 percent in 2013 and 2.6 percent next year. The body cut its global growth forecasts for this year and next as emerging-market economies including India and Brazil cool.
The RBA’s rate setting is “appropriately accommodative at the moment given the headwinds,” Aitken said. “It has some room if there is a large change to the outlook, the 250 basis points cushion, but the scope for maneuver is fairly limited and we’ll see to what extent the 225 basis points of cuts that are already in the system work through.”
Intervention to weaken the Aussie is unlikely, Aitken said.
“The decision to intervene would basically be a decision to go against what has been a fairly stable and effective framework,” he said. “There’s also the question about how effective that would be given that the Australian dollar is a very highly traded global currency.”
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