Australian dollar likely to fall materially, says central bank chief Glenn Stevens

PUBLISHED : Tuesday, 29 October, 2013, 2:04pm
UPDATED : Tuesday, 29 October, 2013, 2:04pm

Australia’s top central banker said on Tuesday it was likely the Australian dollar would fall materially in the future given the country’s declining terms of trade, a shift that would be welcome to trade-exposed sectors of the domestic economy.

Speaking at an investment conference, Reserve Bank of Australia (RBA) governor Glenn Stevens also played down concerns about a possible bubble in housing prices, though he did caution borrowers and lenders against getting too carried away.

Stevens also had words of caution for investors in foreign exchange, saying the recent rise in the Australian dollar had come from levels that were already “unusually high”.

“These levels of the exchange rate are not supported by Australia’s relative levels of costs and productivity,” said Stevens.

“Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today.”

The Australian dollar fell about a third of a US cent in reaction to his comments, hitting a session low of US$0.9541.

The local currency has climbed almost 8 per cent against the US dollar in the last couple of months, in large part owing to the US Federal Reserve’s decision to delay the tapering of its asset purchasing programme.

Indeed, Stevens noted that when the Fed did finally start to wind back its stimulus, this would lessen some of the policy difficulties that the RBA itself was facing.

These levels of the exchange rate are not supported by Australia’s relative levels of costs and productivity
RBA governor Glenn Stevens

The RBA has long favoured a lower Australian dollar, as it would help support the economy in the face of a slowdown in mining investment.

Stevens noted that the outlook for business investment more broadly was still subdued and it might be “a while yet” before there was any conclusive evidence of a change there.

That muted outlook is one reason many economists believe the central bank might yet have to cut interest rates again from an already record low of 2.5 per cent.

Stevens said rises in share and house prices in the past few months had helped lift business and household confidence, though it was too early to say if this would feed through to higher spending and investment.

While the increase in home prices has revived talk of a bubble, Stevens said it was too early to signal any “great concern” on this development.

Stevens said some rise in prices was normal and needed to provide an incentive to build more homes. Growth in mortgage credit had also remained subdued, suggesting that the gains in prices were not fuelled by excessive borrowing.

Still, he cautioned borrowers and lenders not to get carried away in the housing market and urged banks to maintain strong lending standards.