• 23/06/2024

Australia central bank – no automatic reason to follow global rate hikes

Swati Pandey and Wayne Cole| Reuters| 22 July 2017


The recent outbreak of hawkishness by policymakers in the western world does not automatically mean that interest rates need to rise in Australia, a top central banker said on Friday.

Canada’s central bank increased interest rates to 0.75 percent this month while the U.S. Federal Reserve has raised rates four times over the past two years. Policymakers in Europe have also shifted to a less dovish stance.

That led some investors to build long positions in the Australian dollar (AUD=D4) in anticipation the Reserve Bank of Australia (RBA) might echo its global peers.

The local dollar surged to a two-year peak of $0.7992 (0.6168 pounds) this week. It last stood at $0.7934.

“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase,” RBA Deputy Governor Guy Debelle said in a speech in Adelaide.

The Aussie also got a boost this week after the RBA’s minutes of its July policy meeting showed board members had discussed the neutral rate of interest.

The RBA sees the neutral policy interest rate – which neither stimulates the economy nor retards it – at 3.5 percent compared to the official cash rate of a record low 1.50 percent.

That was interpreted by some in the market as a hawkish message, a conclusion that Debelle rejected.

“No significance should be read into the fact the neutral rate was discussed at this particular meeting,” Debelle added.

He pointed out that the policy rate in Australia was low because the neutral rate was lower than it used to be. That means the current policy setting was not as expansionary as a 1.50 percent cash rate would have been in 1990s or early 2000s.

Debelle also noted that a rising local currency could “counteract” the benefits of low cash rates and faster global growth.

“While an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the Australian economy, an appreciating exchange rate works against this,” he added.


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