RBA Governor Glenn Stevens says Aussie Dollar needs to fall further to US75c

Mozo

Friday 12 December 2014

Thinking about an overseas holiday? It may be a good idea to bite the bullet and book those flights, as the Reserve Bank of Australia Governor Glenn Stevens has suggested a further drop in the value of the Australian dollar to US75c is needed to achieve balanced growth.

Reserve Bank of Australia Governor Glenn Stevens

This follows an already sharp decline in recent months to its current value at the US82c mark. In an interview with The Australian Financial Review, Stevens said that while the exchange rate is a moving target, it has come down from an unusual and unsustainable level above parity.

Stevens explained with a lower exchange rate, “the price of foreign goods and services go up, and that will affect their behaviour, including the tendency for them to substitute between foreign and domestic [goods and services].”

Overseas holidays will also become dearer as the dollar buys less on foreign shores, but petrol prices are forecast to drop.

Stevens attributed the sliding exchange rate in part to the US dollar being re-rated across currencies due to a strengthening US economy, lower oil prices and the expected normalisation of interest rates in the US.

A drop in exchange rates would also aid a stabilisation in Australia’s terms of trade - a measure of export income - which Stevens acknowledged was falling “further and faster” than a year ago. While still at historic highs, the weaker terms of trade is expected to impact the Federal Government’s mid-year budget update due to falling revenue projections.

On the budget position, Stevens noted that the focus should not be on achieving a surplus in a particular year but rather on building public accounts to be “sustainable and robust” over a five-year medium-term basis.

Stevens said that the overall message the RBA wants to convey is one of predictability and stability, to boost confidence in the economy. He emphasised that the RBA’s predictions last year that inflation would be between 2-3% have materialised, and economic growth is also expected to reach 2-3% in 2014.

Further cash rate cuts from current lows of 2.5% have not been ruled out, especially if they are accompanied by a confidence-enhancing narrative. Stevens dismissed the notion that the RBA has run out of rate-based stimulus measures, but noted that the impact on savers relying on interest would need to be carefully considered.

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