RBA not ruling out intervention on $A

The Australian dollar is higher than it should be and the Reserve Bank of Australia is keeping an open mind about intervening to bring it lower, governor Glenn Stevens says.

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Although the RBA has expressed concern about the high Australian dollar, the benefits of intervention do not outweigh the costs at this point, Mr Stevens said in a speech marking the 30th anniversary of the floating of the Australian dollar.

Intervention in the foreign exchange market would involve selling Australian dollars to buy foreign currency.

“Overall, in this episode so far, the bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost,” Mr Stevens said.

“But that doesn’t mean we will always eschew intervention.

“In fact we remain open-minded on the issue.

“It remains part of the toolkit.”

Mr Stevens said the Australian dollar was “currently above levels we would expect to see in the medium term”.

The high Australian dollar was partly why Australia’s cash rate was at a record low of 2.5 per cent, he said.

“We have the situation the global economy gives us and we respond to that the best we can and at the moment that means the cash rate has to be at a 50-year low even though the economy is not at a 50-year weak point and inflation is not at a 50-year low either,” Mr Stevens said.

“Part of the reason, but not the only reason, is that the currency has been very high and was initially slow to fall.

“It’s been the boom of gloom – the rest of the world is much more confident in us than we are in ourselves, which is part of the reason why the exchange rate has been where it is.

“There are positive signs. I think we have reasons to be optimistic.”

Since the currency was floated, the market had generally moved the exchange rate to the right spot eventually, Mr Stevens said.

“At various times we have worried that the market was behaving irrationally, believing that the exchange rate should have been somewhere other than where it was. And sometimes we were right about that,” Mr Stevens said.

“Yet, looking back, on balance the evidence suggests, I think, that the market has mostly moved the exchange rate to about the right place, sooner or later.”

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