The dollar has remained strong despite a fall in the terms of trade. Photo: Adam Turner
The Reserve Bank of Australia says it has scope to cut interest rates, if needed, to offset the effect of the high Australian dollar.
RBA assistant governor Guy Debelle this morning said the central bank had been able to counter the effects of the high value of the Australian dollar on the economy by cutting the cash rate.
And, he said, the RBA could further cut the cash rate, currently at 3.0 per cent, if the high dollar continued to have a negative impact.
‘‘To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates,’’ he said in a speech to the University of Adelaide Business School. ‘‘We still, obviously, retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.’’
Mr Debelle also said that, theorically, there was no limit on the bank's ability to sell the local dollar should intervention be warranted.
The Australian dollar slipped on Mr Debelle's speech, falling to the morning's low of $US1.0249, after earlier trading slightly above $US1.03. It's currently trading at $US1.0268, having traded above the parity mark for most of the past two years, despite a fall in Australia’s terms of trade over that time.
The RBA cut the cash rate a total of 1.75 percentage points between November 2011 and December 2012. But Mr Debelle warned that cutting interest rates too far could also create problems for the economy - forcing up the price of assets and causing people to borrow more than they could afford.
‘‘It can generate excess credit expansion or asset price inflation or imbalances elsewhere in the economy,’’ he said. ‘‘The current experience of Canada, Hong Kong and Switzerland is salient in this respect.’’
Mr Debelle also said the RBA’s rate cuts over the past two years had less of an impact on mortgage rates than in the past, due to higher bank funding costs.
‘‘The cash rate has a large influence on lending rates, but there are other factors such as credit risk premia, competitive pressures in the deposit market, as well as changes in the mix of funding banks use.
‘‘Over the past five years, there has been quite a material change in a number of these factors, so that while changes in the cash rate are still the predominant determinant of changes in lending rates, the relationship between them is not one for one.’’