Thursday, July 03, 2014

RBA: Dollar overvalued, “and not by just a few cents”

The Reserve Bank has believes the Australian dollar is set to fall significantly, “and not by just a few cents”.

It’s also worried about Sydney house prices.

Addressing the Australasian Meeting of the International Econometric Society in Hobart on Thursday the Bank’s governor Glenn Stevens also delivered a slap in the face to government and opposition frontbenchers who have been making big claims about the May budget.

“The federal budget seems unlikely materially to change the near-term outlook,” he told the conference. “Over the next couple of years the estimated impact of the budget is not very different from what we had previously been assuming.”

Like Labor’s cuts, the Coalition’s cuts were “actually not particularly large when compared with past episodes of fiscal tightening”.

At 94 US cents to the dollar Australia’s current exchange rate was far too high.

“Lest there be any uncertainty about this, let me be clear, again, that the exchange rate remains high by historical standards,” Mr Stevens told the conference. “When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents"..
“Of course, we live in unusual times, with interest rates at the ‘zero lower bound’ in several major jurisdictions. Nonetheless, we think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point,” Mr Stevens said.

Only in Sydney was the Bank concerned about the resurgence of the housing market.

“The growth of credit outstanding for housing is about 6 to 7 per cent per annum, or slightly above trend nominal income growth. It is hard to mount the soap box to complain about that pace,” Governor Stevens said.

“Nonetheless... investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring. The total value of credit approvals for investor loans in New South Wales as a whole is about 130 per cent higher than in 2008, and it is in the investor segment where there has been evidence of some increase in lending with loan-to-value ratios above 80 per cent.”

“People should not assume that prices always rise. They don’t; sometimes they fall.”

“Some segments of the housing market do appear to have been calming down lately. Prices have flattened out in several cities and even in Sydney the pace of increase has lessened.”

“It remains to be seen whether this slower pace of growth in dwelling prices is temporary or more persistent. It would in my opinion be good, for a range of reasons, if it did persist for a while. If the next couple of years saw an unremarkable
performance on prices, and construction staying at the higher levels that will clearly be reached over the coming year, it would be an outcome that would contribute to a
balanced growth path for the economy and to housing more people at manageable cost.”

The bank did not believe the resurgence of the housing market warranted higher interest rates.

“This isn’t because we think that financial stability considerations should be ignored. On the contrary, they should be, and have been, given due weight, along with all the other factors we have to take into account, in deciding the interest rate path. We judge that path to have best balanced, to date, all the various considerations,” Mr Stevens said.

In The Age and Sydney Morning Herald

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