RESERVE BANK: It Will Take Time For Businesses To Believe In A Lower $A

Australia’s cash rate is at a record low but it may take awhile yet for the weakened dollar to help boost the economy, the Reserve Bank has noted.

In a broadly unsurprising August Statement on Monetary Policy, the RBA noted that the AUD had fallen about 15% against most currencies from its April peak.

Here’s what it said:

In trade-weighted terms, the Australian dollar is now around its lowest level since AugustĀ 2010, though it remains at a high level by longer-term standards.

[…]

The depreciation seen to date is expected to add to economic activity and to prices of tradable items, although by how much and over what period cannot be precisely estimated.

It may be that the effect could be slower than in the past if businesses wait to see if the exchange rate is sustained at a lower level for some time before responding.

It is also possible that just as the high terms of trade and high level of investment led to a higher exchange rate over recent years, a lower terms of trade and lower investment could lead to a further depreciation of the exchange rate.

If this were to occur, it could help with the rebalancing of the economy by bolstering activity in the trade-exposed sector and raising the profile for overall economic activity. It would also push up tradable prices further, temporarily adding to inflation.

A lower AUD is particularly important as the Australian economy rebalances, shifting away from its heavy reliance on the mining sector.

The RBA estimates that a 10% fall in the AUD could stimulate GDP growth by 0.5%-1% over two years, and boost inflation by 0.25%-0.5% over each of the next 2 years.

However, the RBA expects non-mining investment to “remain subdued in the near term”.

Here are some other key points:

– The RBA’s global economic outlook is softer than it was in May. Chinese economic growth is slowing and European conditions are weak but the US and Japan are recovering.

– Australia’s major trading partners will grow at a rate of just below 4% this year and 4.5% in 2014.

– Australian economic growth is below trend. The housing market is improving but household consumption is slow and the labour market is weak with wages growing at at the slowest pace since the early 2000s.

– The RBA’s near-term domestic economic outlook is also weaker than it was in May, with GDP growth expected to drop to 2.25% in 2013 (compared to a previous 2.75% forecast), before recovering to 2.5% in mid-2014. Analysts say the revision indicates a “clear easing bias” from the RBA.

Now read: The Australian Government’s Downgraded Economic Forecasts Are Closer To Market Predictions

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