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Aussie dollar must fall: RBA

The lower Australian dollar is helping the Australian economy adjust to the end of the mining investment boom, but it’s still high, a senior central banker says.

When the Aussie dollar stayed high even when mining investment and commodity prices began to fall, it was not playing its normal part in helping the economy to rebalance, Reserve Bank of Australia assistant governor Christopher Kent said in a speech in Hobart on Wednesday.

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“However, the Australian dollar has depreciated by nearly 20 per cent (on a trade-weighted basis) since its peak in mid 2013 and is starting to play a role in helping the economy to adjust,” he said.

Even so, Dr Kent fired another shot in the RBA’s battle to talk the currency down.
 The lower exchange rate will direct more spending to Australian-produced goods and services – including tourism and education – as they become more cost competitive.

“While the depreciation seen to date will be helpful, our assessment is that our exchange rate remains relatively high given the state of our overall economy,” Dr Kent said.

Slower wages growth is an important source of adjustment.
 Dr Kent said the combination of slower wage rises, caused by below-normal economic growth in the past few years, and the falling exchange rate had lowered Australian wage rates by 30 per cent in US dollar terms.

The lower exchange rate, more competitive wages and a recent pickup in productivity growth had put the economy on a stronger footing, he said.

Looking ahead, the assistant governor said, very low interest rates should sustain strong activity in the housing market, support household wealth and encourage households to bring forward spending.

He repeated the RBA’s well-known view that unemployment would “rise for a bit longer and peak a bit higher than previously expected”.

He identified housing and the services sector – including health and education – as industries likely to generate the faster economic growth that would lead to a decline in unemployment.
But he warned against complacency.

Australia has many strengths in service industries but does not have the obvious natural advantages of the mining and agriculture sectors, he said.

“This means that we will need to continue to work hard to maintain competitiveness in these global markets.”

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