RBA unmoved amid warnings strong Aussie dollar will hinder the economic recovery

The RBA appears comfortable with the Aussie dollar even amid warnings a strong currency will drag on economic recovery.

The sun has set on monetary policy, but bond investors are speculating Reserve Bank of Australia governor Phillip Lowe may be moved to do more to help prop up demand for credit in the coming months. Picture: AAP

The Reserve Bank of Australia says it is comfortable that the Australian dollar is not overvalued, despite warnings that the currency’s rapid rise over the past six months to multi-year highs poses a threat to the nation’s post-COVID economic recovery.

The RBA’s sanguine attitude towards a strengthening currency through “the biggest shock to economic activity since the 1930s” was revealed in minutes from the September 4 board meeting. At that meeting, the board decided to hold its cash and three-year rate targets at 0.25 per cent, and to expand and extend its cheap funding facility for banks.

The dollar has seen a stunning recovery over the past six months, from a 17-year low of US55.10c in March at the height of panic in financial markets to a two-year high of US74.1c this month.

Yet the RBA minutes showed the central bank saw no signs the dollar was overvalued: “The appreciation of the Australian dollar had been consistent with the increase in commodity prices, particularly iron ore prices, over recent months”.

The minutes also noted that “a lower exchange rate would provide more assistance to the Australian economy in its recovery”.

As the RBA sits on the sidelines, industry research group IBISWorld warned that “the expected strength of the Australian dollar in coming months is likely to hinder the economic recovery from COVID-19”.

The Morrison government on Tuesday unveiled an economic program aimed at securing reliable, cheap gas supplies for businesses to help power the post-COVID lift in economic activity, but a stronger currency will work against a business-led recovery by making our exports less competitive, IBISWorld senior industry analyst Will Chapman said.

“The new-found strength of the Australian dollar has significant implications for Australia’s economic recovery from its first recession in nearly 30 years,” he said. “The persistent strength of the Australian dollar is likely to constrain export growth and make the recovery from COVID-19 more dependent on domestic consumption.

“Given the RBA’s limited scope to weaken the currency through looser monetary policy, the federal government will likely need to increase its focus on stimulating domestic consumption to drive economic recovery.”

Australian Chamber of Commerce and Industry chief economist Ross Lambie said the relatively strong currency was “probably not doing that much harm” at the moment, given the ban in international travel, but “the economy really needs a lower dollar” to help drive next year’s forecast recovery.

Economic modelling from the RBA late last year estimated that a sustained 5 per cent depreciation of the exchange rate — equivalent to about US69c at current levels — would add about 0.5 percentage points to annual economic growth over its two-year forecast horizon. That would lower the unemployment rate by about 0.4 percentage points.