Bloomberg News

RBA Says ‘Pretty High’ Aussie Tests Firms’ Adaptibity

June 12, 2012

Reserve Bank of Australia Governor Glenn Stevens

Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Brendon Thorne/Bloomberg

Reserve Bank of Australia Governor Glenn Stevens said the strength of the nation’s currency benefits consumers and probably will be sustained as mining investment intensifies, forcing businesses to change to survive.

“It’s a test of adaptability,” Stevens told business, union and community leaders today in the northern city of Brisbane. “While I’m very conscious that a number of sectors are really struggling with the exchange rate where it is, we shouldn’t wish too quickly for a low exchange rate.”

Every time Australians put gasoline in their cars, buy consumer goods or travel overseas, they’re enjoying lower prices generated by the strong exchange rate, Stevens told the forum convened by the government to discuss the local dollar’s impact on the economy. “There are big benefits to us as consumers from a high currency and that is part of the mechanism for spreading the gains of the resource boom,” he said.

Prime Minister Julia Gillard’s government is struggling to reconcile one of the developed world’s fastest-growing economies with public pessimism about their own prospects. A private report today showed consumer confidence stagnated near the lowest level this year even after the RBA lowered borrowing costs by 75 basis points at the past two meetings to 3.5 percent.

‘Grumpiness,’ Dissatisfaction

There is “grumpiness, dissatisfaction” among households and a lower growth rate of consumer spending, Stevens said. He said the economy is always a “patchwork quilt” that’s boosting the prospects of some and hurting others.

The Australian dollar has soared about 75 percent in the past decade, reflecting surging demand from developing nations in Asia such as China for the nation’s iron ore and coal. It bought 99.43 U.S. cents as of 11:39 a.m. in Sydney, little changed from yesterday, when the currency climbed by 1 percent.

“We think that a $1 is high, but actually I can remember it being $1.40 in my teen age,” 54-year-old Stevens said of the value of the local currency against the U.S dollar. “If you go way back, in the days when we were pegged to sterling, we were way higher than $1, and there’s been a long downward trend at least until about 2000.”

On the basis of the inflation-adjusted, or “real exchange rate,” which Stevens said provides a better gauge of Australia’s competitive position, the currency is “actually pretty high here,” he said.

Currency’s Effects

Australia’s economy is being driven by the biggest resource bonanza since the 1850s as China and India increase demand for minerals and energy. In contrast, tourism, manufacturing and retail have weakened under the high currency.

“Unless you’re very pessimistic about China and so on, it’s likely we have a relative price story that is persistently pretty different to what we’ve seen for the past 100 years,” Stevens said today. “If that’s true, then a lot of other changes follow.”

Confidence in Australia remains subdued even after the central bank lowered rates, the government announced cash handouts in May, the economy expanded twice as fast as forecast last quarter, and employment growth accelerated.

A Westpac Banking Corp. (WBC) and Melbourne Institute survey taken June 4-10 of 1,200 consumers released today in Sydney showed the sentiment index for June rose just 0.3 percent.

‘Disappointing’ Sentiment

“This is another disappointing result,” Bill Evans, Westpac’s chief economist, said in a statement. “Clearly other factors are dominating rates in the minds of consumers -- those factors are concerns about the domestic economy and international conditions.”

The RBA cut interest rates in the past two meetings to shore up growth as weakness in Europe and China threaten the global outlook. Stevens said in a speech last week that he felt the need to do some “cheerleading” for the economy in response to negative commentary about the country’s prospects.

Moody’s Investors Service said today that the outlook for Australia’s Aaa rating remains stable.

“Economic strength is classified in Moody’s rating methodology as very high, based on the country’s economic diversity, the performance of the economy during the past two decades, relatively good growth prospects and high per capita income,” Moody’s said.

The Australian economy’s relative strength compared with Europe and the U.S. hasn’t translated into more popularity for Gillard, the country’s first female leader who faces an election by the end of 2013.

A Newspoll released this week showed her ruling Labor party’s favorability dropped 1 percentage point to 31 percent and the Liberal-National opposition fell 2 points to 44 percent.

The survey of 1,146 people was taken June 7-10 and had a margin of error of 3 percentage points. The Greens gained 2 percentage points to 14 percent, the poll published in the Australian newspaper yesterday showed.

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net; Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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