Reserve Bank of Australia governor Glenn Stevens says he’d prefer a fall in the value of the Australian dollar over lower interest rates as a means to lift the local economy.
Stevens told The Australian Financial Review on Friday he would like a dollar closer to 85 US cents to help stimulate trade-exposed sectors of the economy.
The Australian dollar was trading at 90.31 US cents on Thursday – down from 91.31 cents a day earlier – and given the falling terms of trade, Stevens hopes it continues to move lower.
“To the extent that we get some more easing in financial conditions, at this point it’s probably more preferable for that to be via a lower currency at the margin than lower interest rates,” he said.
“I thought (US)85 would be closer to the mark than (US)95.”
In the wake of Holden’s announcement it will quit local production by the end of 2017, Stevens said the car industry faced more challenges than just the exchange rate.
However, the RBA boss added he believes manufacturing has a future in Australia.
Dollar only one factor for Holden
Stevens has also bought into the debate raging about Holden’s decision to cease manufacturing in Australia, saying the car industry’s challenges are not just about the exchange rate.
US car giant General Motors cited the relatively high value of the Australian dollar as one component of a perfect storm that had made its local operations unsustainable.
Mr Stevens said the exchange rate is not the only issue for local car makers.
“The Australian car industry has been in structural change for quite a long time, at many different exchange rates, including ones much lower than we presently see,” he told The Australian Financial Review on Friday.
It was going to be “a tall ask” for any manufacturer to share a small portion of what was a pretty small market if it was not part of some bigger global chain.
With a falling terms of trade, Mr Stevens expects the Aussie’s dollar’s natural level to be lower than its overnight rate of US89.40 cents.
“I thought [US]85 would be closer to the mark than [US]95 … but really, I don’t think we can be that precise.”
If things over the medium term evolve as the bank is assuming it would be surprising if “a nine at the front is the right number”.