Reserve Bank of Australia sees room to ease, wants lower currency

Canberra / Bloomberg

Australian central bank Deputy Governor Philip Lowe said that low wage growth and contained inflation provide scope to cut rates further and said, like most of his global peers, he’d prefer a weaker currency.
The Reserve Bank of Australia’s official said the economy had proved pretty resilient to the winding back of a massive mining investment boom and a commodities rout, aided by the combination of a lower currency, record-low wage growth and a flexible labor market — with the latter being a key barometer for any further easing.
“As the Reserve Bank has indicated for some time, this low inflation outlook provides scope for easier monetary policy should that be appropriate in supporting demand growth,” Lowe said in the text of the speech in Adelaide.
“An important factor here will be whether the growth in aggregate demand continues to be sufficient to accommodate the growth in our labour force.”
The central bank has paused interest rate cuts at a record-low 2 percent for the past 10 months as it allows earlier stimulus to work its way through the economy. There are signs of an upswing as the economy expanded 3 percent in the fourth quarter from a year earlier and added the most jobs on record in the same period.
Yet the early portents for this year, particularly from offshore, have been less encouraging.
China, the nation’s largest trading partner, is undergoing a difficult transition to a more consumption-led and service-based economy, while dealing with high levels of corporate debt and the complications of opening its capital account, said Lowe, the heir-presumptive for Glenn Stevens when the current governor retires in September.
Then, there’s global monetary policy: the US raised rates in December while the Bank of Japan joined the European Central Bank, the Swiss National Bank, the Swedish Riksbank and the Danish central bank in adopting negative rates.
That’s helped reverse the Australian dollar’s depreciation and Lowe said the RBA would prefer the currency to weaken.
Most central banks would like lower currencies as global growth is disappointing and inflation outcomes are low, he said in response to questions after the address, adding “I think, like everyone, we would welcome a slightly lower exchange rate” to help with rebalancing of the economy.
“Health care has been a standout, with annual growth in jobs averaging about 4.5 percent over the past two years,” he said.
“There has also been strong growth in jobs in business services, following a period of weakness
a few years ago when exploration
activity and pre-construction work in the resources sector were being scaled back.”