Australia’s top central banker said inflation would be no bar to a cut in interest rates and the local currency could fall further, fuelling expectations of another cut in interest rates next week and driving the Australian dollar to a two-week low.
In a speech titled Economic Policy after the Booms, Reserve Bank of Australia (RBA) Governor Glenn Stevens highlighted challenges ahead as a long boom in mining investment comes to an end.
A slowdown in demand from top commodities consumer China, combined with talk from the US Federal Reserve about scaling back its bond-buying stimulus programme, have weighed on the Australian dollar in the past three months.
“The recent decline in the exchange rate seems to make sense from a macroeconomic perspective,” Stevens told a charity lunch on Tuesday, a week before the RBA next reviews policy. “It would not be a major surprise if a further decline occurred over time.”
The Aussie dollar fell more than half a US cent after his comments, hitting a two-week low of US$0.9085 and taking losses for the day to more than 1.2 per cent.
The currency has fallen around 13 per cent against its US counterpart since April, a windfall to local miners and other exporters, while inflation has been contained.