RBA Governor Stevens: Open To FX Intervention When Convinced Of Its Merit The Reserve Bank remains open-minded on intervening in the foreign-exchange market if it is convinced the move is effective and useful, and reinforces fundamentals, Governor Glenn Stevens said Thursday. Stevens made the comments in a speech at the annual dinner of the Australian Business Economists on the topic The Australian Dollar: Thirty Years of Floating. He provided one of the clearest hints the RBA may be willing to consider intervention to push the Australian dollar lower, saying the step remains part of the toolkit and could be used in the right circumstances. Overall, in this episode so far, the bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost. But that doesnt mean we will always eschew intervention. In fact we remain open-minded on the issue, Stevens said. Our position has long been, and remains, that foreign exchange intervention can, judiciously used in the right circumstances, be effective and useful. It cant make up for weaknesses in other policy areas and to be effective it has to reinforce fundamentals, not work against them. Subject to those conditions, it remains part of the toolkit, he added. On a fundamental basis, Stevens suggested the exchange rate is currently misaligned but the extent isnt clear. He said In the end it is not possible to come to a definitive assessment on the extent of currency misalignment at the moment, on the basis of standard metrics (and having regard to the statistical imprecision of such metrics). But my judgement is that the Australian dollar is currently above levels we would expect to see in the medium term, he said. Elsewhere, he said, the currency may be above its longer-term equilibrium though it is also possible the mean level itself may not be the right one, and the RBA has taken this into account to evaluate the merits of intervention. Notwithstanding that, in my view, the Australian dollar is probably above its longer-run equilibrium at present, it is far from clear that we can assume that the mean level we saw in the 1980s to the early 2000s will be the relevant one in the future, Stevens said. Talking about costs associated with intervention, Stevens said those who argue for intervention either dont take costs into account or assume it is entirely costless. That cant be assumed and the idea should be considered in a cost-benefit setting, he said. Stevens said assessing the exchange rates level is difficult and data show the past relationship between the currency and terms of trade have continued to hold. But he added that it was possible that a large and prolonged rise in the exchange rate could have effects beyond what was seen in the past, and the RBA recognizes this. Nothing looks very unusual right at the moment, he said referring to the exchange rate-terms of trade graph. But this relationship is estimated over a period in which the changes were generally cyclical. It is at least conceivable that a large and persistent rise in the exchange rate may have effects on the economy beyond those discernible from the experience of the past thirty years, if previous rises in the exchange rate were not long-lived enough to cause significant structural change. This is a possibility the Reserve Bank has noted in the past couple of years, Stevens said. Assessing the exchange rates recent behaviour is complicated by the fact that is driven by the search for yield effect of extraordinary monetary policies in major economies of the U.S., Japan, and the euro zone, and diversification effect due to Australias own AAA sovereign rating, Stevens said. But such flows have surely been important at times, though not necessarily lately, Stevens said, pointing to data that show foreign holdings of Australian government debt stopped rising in the middle of last year and earlier flows into Australian bank obligations have generally continued to reverse over that time. He also pointed to the most obvious capital inflows in the past couple of years have been in the form of direct investment into the mining sector.
Posted on: Thu, 21 Nov 2013 09:38:14 +0000
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