Aussie slides on RBA speech

The Aussie dollar has dropped below US79¢ on comments after a top RBA said financial markets shouldn’t “read into” the RBA’s internal debate over the neutral interest rate or assume that near-term rate hikes are inevitable in the wake of tightening by offshore central banks.

Guy Debelle, the Reserve Bank’s deputy governor, suggested that while the fact that global central banks aren’t set to deliver any additional monetary policy stimulus – which Australia’s central bank would be compelled to match – negative factors keeping official interest rates low such as the lingering impact of the financial crisis, weak company investment, low wage growth and weak inflation “are still present'”.

“While there are some tentative signs that they are abating, the evidence is inconclusive at this stage.”

Debelle, speaking at a lunch function in Adelaide hosted by the Committee for Economic Development of Australia, downplayed the fact that the US Federal Reserve has hiked its key policy rate four times over the past two year to 1 per cent, as well as last week’s increase by the Bank of Canada to 0.75 per cent.

“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase,” he said.

“The policy rates in both the US and Canada still remain below that in Australia.”

Debelle devoted a considerable portion of his speech – titled “Global Influences on Domestic Monetary Policy” – on the significance of a significant decline over the past decade in Australia’s neutral interest rate, a topic that was debated at this month’s board meeting.

News of the discussion – and the fact the bank now thinks the new normal is 3.5 per cent – was revealed in the minutes of the July meeting released on Tuesday, triggering a surge in the Australian dollar close to US80¢ and heightened expectations for rate hikes early next year.

“No significance should be read into the fact the neutral rate was discussed at this particular meeting,” Debelle said. “Most meetings, the board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate.

The concept, which Debelle said is not directly observable, is a theoretical level at which the official cash rate would reach once full employment and stable inflation expectations are met.

The dollar slid about four-tenths of a cent to the day’s low of US78.90¢ following the release of the speech.

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