Using a lower exchange rate to add a kicker to economic growth is something the RBA has come close to perfecting since the Australian dollar was floated in 1983.
But in Sydney today RBA Assistant Governor (Financial System) Malcolm Edey said the current race to weaken exchange rates being pursued by many central banks isn’t working – and won’t work.
That’s because in the past when a nation has fallen into recession, or suffered a banking crisis like the one seen during the GFC, the country’s central bank could lower rates, drive down the currency and take a competitive boost for growth in the economy from the lowered exchange rate.
That mechanism flows because a lower exchange rates makes the nation’s businesses more competitive.
But there is a problem with that in a post-GFC world, Edey said, in explaining the drawn out nature of the globe’s economic malaise (our emphasis):
An exacerbating factor, too, has been the international dimension. When a financial or a banking crisis occurs in a single economy, or in a relatively small number of countries, exchange rate depreciation is often part of the market response and part of the recovery mechanism. But there is obviously much less scope for that mechanism to work when a crisis affects large parts of the global economy simultaneously.
Translated into non-central banker English that means “we can’t all devalue at once”.
That might explain why the RBA has been fairly sanguine about the recent recovery of the Australian dollar from below 70 cents. It might also explain why the Chinese aren’t rushing to crush the Yuan lower just yet.
If driving the currency weaker won’t help, then what’s the point?