Tuesday, July 2, 2013

RBA Aiming for Weaker Currency
The Reserve Bank of Australia (RBA) left its key interest rate at a record low of 2.75% today. That’s down by 2 percentage points since November 2011. Governor Glenn Stevens said in a statement accompanying the decision that “the economy has been growing a bit below trend over the recent period” and “this is expected to continue in the near term as the economy adjusts to lower levels of mining investment.” The statement noted that a slide in the currency may continue:
The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.
The minutes of the June 4 Monetary Policy Meeting of the Reserve Bank Board stated:
The exchange rate had also depreciated noticeably, though it remained at a high level considering the decline in export prices that had taken place over the past year and a half. It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy.
Australia’s mining sector has been hard hit by the global economic slowdown, especially in China. The minutes noted:
Based on public statements by mining companies and information from the Bank's liaison, it seemed likely that mining investment was near its peak but would probably remain at a high level for the next year or so. However, members observed that there was considerable uncertainty about mining investment beyond that period. In particular, changes in production and exports of energy commodities in other countries were making it more difficult to assess the potential for new projects in the gas sector in Australia. Overall, conditions in the business sector remained somewhat subdued, with survey measures for all industries at, or below, average levels.
Bloomberg observed today that Prime Minister Kevin Rudd, who returned to office last week after a three-year hiatus, has focused on the risks of the slowdown in China. On June 27, a day after ousting Julia Gillard as leader of the ruling Labor party, he told Parliament: “The China resources boom is over. The China trade itself represents such a huge slice of the Australian national economy that we are looking at one huge adjustment for this nation’s standard of living in the future unless we continue to act with appropriate policy responses.”

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