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RBA To Intervene Only When Currency Is "Seriously Overvalued", Stevens Says


Reserve Bank of Australia Governor Glenn Stevens on Friday defended the policy board's decision to keep the interest rate at 3 percent and said he needs to be pretty much confident that the currency is "seriously overvalued" before launching a large scale intervention.

In his opening statement to House of Representatives Standing Committee on Economics, Stevens said, "at least at the moment, my sense is that the appropriate interest rate for the economy's circumstances is in fact the pretty low one we have."

This is "not because we face an emergency," but because "we face some other forces of a more slowly evolving nature," he said in response to queries from lawmakers.

The Reserve Bank's cash rate has been reduced six times over the past sixteen months, for a total decline of 175 basis points.

At the same time, he pointed out that the exchange rate remains somewhat higher than one might have expected given the decline in export prices so far observed. "This has been a relevant factor in the setting of interest rates. It is not that interest rates are seeking a particular exchange rate response, but they are being set with a recognition of the exchange rate's effect on the economy," Stevens said.

"To date here, as I say, my sense is it is too high, but it is on the best metrics I have available to me, it is somewhat too high, but we're not talking 50 percent or something like that," he said. "You need to be pretty confident that it is seriously over-valued, or the market is behaving in some quite irrational way, before you would launch a large scale intervention."

Stevens said that there was a good deal of interest rate stimulus in the pipeline. He pointed out that at the February meeting, the Board judged that it was sensible to allow it time to do its work. Also, the Board believed that the inflation outlook would provide scope to ease further, should that be necessary to support demand. But for now, the Board decided it was prudent to sit still, Stevens noted.

He was of the view that the economy has entered 2013 at a pace a little below that in 2012, when growth was about trend. The policymaker observed that the economy would be adjusting to the peak of the mining boom and some other areas of demand would have room to grow more quickly than they have in recent years.

In a quarterly report released earlier this month, the central bank said it expects GDP growth to be below trend at around 2.5 percent over 2013, weaker than the 2.75 percent growth predicted in November.

by RTTNews Staff Writer

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