The Reserve Bank of Australia has dumped its overt strategy of talking down the dollar and has ramped up warnings about steep rises in property prices.
As the central bank’s board left the cash rate at a record-low 2.5 per cent for an eighth straight month, governor Glenn Stevens pointedly declined to describe the currency as “uncomfortably” high – a term he used in December when the dollar was several cents lower than US93U:, which it hit on Tuesday.
Mr Stevens said the currency’s recent gains reduced the benefit to the economy. At the same time, low rates are expected to boost economic growth, helped by a surge in new home construction.
The shift in tone is a significant acknowledgement recent attempts to “jawbone” the dollar lower have floundered and threaten to undermine the bank’s credibility.
In January board member Heather Ridout said that she would like to see the dollar closer to US80<t.
Mr Stevens signalled in an interview with The Australian Financial Review in December that the dollar should Continued p6 * Philip Baker Silence a nudge to SA p28 ”
From page 1 RBA switches jawbone: $A to houses be closer to US85<t. Instead, the dollar has appreciated by almost 5 per cent since early February, when the bank indicated its two-year interest rate cutting cycle was over and that the next move would be an increase in official rates.
The board now faces an awkward balance between a high currency that it admits is damaging export industries and borrowing costs so low they threaten to unleash a housing bubble.
“It’s a bit schizophrenic,” said Stephen Walters, chief economist at JPMorgan Australia.
“The terms of trade are going down, so I would have thought it was a good opportunity to talk the dollar down.
“Jawboning usually works when the fundamentals are supportive, and I would have thought they are support
ive, with the terms of trade going down and the US Federal Reserve talking about tapering.” Figures published late on Tuesday by the Reserve Bank showed Australia’s most important commodity prices slumped 2 per cent last month, taking the decline over the past 12 months to about 13 per cent By contrast, the dollar rose 3.3 per cent in March, and traded at US92.64<t late on Tuesday after briefly touching a four-month high of US93.04* in the wake of the Reserve Bank’s postmeeting statement Mr Stevens said in the statement that while the dollar’s fall from its highs of a year ago were helping the economy adjust to the end of the resources boom, that support had lessened because of recent gains in the exchange rate.
“The RBA finds itself in a tricky situation on the currency front” said Su-Lin Ong, chief Australia economist at the Royal Bank of Canada.
“Silence is viewed as a green light for
the $A to move higher, while any jawboning lower has become increasingly hollow amid stronger growth and a shift in its bias.
“Today’s small change may well reflect some of the different views among board members as the currency continues to move north.” Another interpretation is that policy makers are increasingly reluctant to jump at shadows in the currency market and are seeking to avoid
twisting and turning their rhetoric according to every move in the dollar.
While the currency remains higher than would be ideal, and interest rates are potentially too low, the combination of both is starting to pay dividends across the economy.
Signs cited by the Reserve Bank that its two-year cycle of rate cuts is starting to spur growth as the economy adjusts to the end of the mining boom include improved
consumer spending over the summer, rising exports and business confidence.
Recent data “foreshadows a solid expansion in housing construction,” Mr Stevens said, as he also softened warnings about an expected deterioration in the labour market “This shift suggests the bank is now less concerned about near-term weakness in the labour market as a proximate driver of policy,” said Commonwealth Bank senior economist Matthew Hassan.
Offsetting those positives were
ongoing concerns about the lack of any strong rebound in investment outside the resources sector and the looming federal budget in May.
Mr Stevens reiterated that the board expects to keep interest rates unchanged “for a period”.
However, many analysts are starting to question how long that period is likely to be, not least because of booming property prices.
Figures released as policy makers met in Melbourne showed property prices surged by a record 2.3 per cent last month, the biggest increase since the series began in 1996.
Sydney led the surge, with prices now almost 16 per cent higher than a year earlier, followed by Melbourne up 12 per cent Mr Stevens – who last week escalated warnings to investors that they shouldn’t assume prices can only go up – said on Tuesday that house prices had gained “significantly”.
He also noted for the first time that credit was “slowly picking up”.
This shift suggests the bank is now less concerned about near-term weakness in the labour market as a proximate driver of policy.
Matthew Hassan, Commonwealth Bank senior economist