The Governor of the Reserve Bank of Australia Philip Lowe told a parliamentary session last week that he wants to see the Australian dollar weaken further as he seeks to resist a need to change the current level of interest rates.
Expecting to see interest rates maintain their record low “for a while yet,” his aim is to keep inflation “comfortably within the target range on a sustained basis.” Given that a rate of full employment nationwide is unlikely to happen for some time, managing the performance of the dollar is important to prevent the tapering of natural inflation and keep wages at an attractive level.
Speaking in Canberra, Lowe said that on this basis, there is no reason to think about changing the “current monetary policy stance” and that some factors would have to significantly develop before he considers otherwise, including a wider uptake in jobs.
Lowe praised the Australian dollar’s ability to rebound against currencies with a bigger state backing and noted in his twice-annual speech to parliament that policymakers in his department and further afield had hoped that the strong performance of the US dollar at present would allow the Australian dollar to weaken.
This would allow inflation to occur at a local level as determined by the market in place as well as producing more jobs. The Reserve Bank of Australia could then start normalizing interest rates and let them find the most-suited level.
Lowe said that this naturalization process “has taken a long time to occur,” and although there may be some suggestions of it already happening, not enough movement in the Australian dollar has taken place. Lowe added that he still thinks “a lower dollar would be helpful.”
The Australian dollar has dropped 8% against its US counterpart this year alone as strong foreign policy rhetoric from US President Donald Trump, the tightening of the Federal Reserve and the struggle of other emerging markets has seen many investors run to keep their money in established currencies such as the US dollar.
The central bank also maintained that there is little chance of tightening any policy until it sees significant rises in household incomes and a noticeable increase in inflation. No changes to Australian interest rates have occurred since 2010.
Lowe did warn against some of the US financial policies and how they might affect Australia, suggesting that tax cuts may not have a beneficial effect on inflation and that increasing protectionism is playing havoc with the markets globally.
Calling himself “less relaxed” about the situation than the financial markets, Lowe said that it is possible that the Federal Reserve will have to reduce or remove some of the financial stimuli that it is adding to its market, which could easily have “disruptive consequences.”
Looking for an increase in consumer-price growth to between 2% and 3%, Lowe is also hoping to get the unemployment rate under 5%, which would allow for a bit of a kick-start on inflation. It currently stands at 5.3%.
Also keeping an eye on “housing market developments,” the central bank welcomed house prices cooling in Sydney and Melbourne, as they “were not sustainable and were posing a medium-term risk to our economy.”