(Updates with comment from economist in 11th paragraph, Abbott in 14th.)
Dec. 13 (Bloomberg) -- Reserve Bank of Australia Governor Glenn Stevens signaled a weaker local currency is preferable over lower interest rates to help spur the nation’s economy, saying the so-called Aussie’s natural level is probably below its current value.
“I thought 85 U.S. cents would be closer to the mark than 95 cents,” he said in an interview published today in the Australian Financial Review. “But really, I don’t think we can be that precise.”
The Australian dollar fell to 89.14 U.S. cents , the weakest since Aug. 30, before trading at 89.23 cents at 10 a.m. in Sydney. It has declined 2 percent over five days, poised for the longest stretch of weekly losses since 1985. The Aussie has weakened 12 percent this year, the biggest loser after the yen among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes.
“If things over the medium term evolve as we’re presently assuming -- and I think it’s reasonable to make these assumptions -- it’s going to be surprising if a nine at the front is the right number,” he said, referring to the exchange rate.
Australian employers boosted payrolls in November, adding to evidence a two-year interest-rate-cutting cycle is lifting demand, a government report showed yesterday. The number of people employed rose by 21,000, the statistics bureau said in Sydney. That compared with the median estimate for a 10,000 increase in a Bloomberg News survey of 26 economists. The jobless rate rose to 5.8 percent from 5.7 percent.
Stevens reduced the benchmark interest rate by 2.25 percentage points since late 2011 to a record-low 2.5 percent. The jobs data and a stronger housing market may add to economists’ expectations that the Reserve Bank will refrain from further stimulus.
“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,” the paper quoted Stevens as saying, in an article on its website.
Asked by the Financial Review about investors who have boosted bets on a rate cut in February, Stevens said, “well, only by a minuscule amount.”
“It’s about one chance in three or something,” he said, according to the paper. “We’ll see when we get to February but, really, the curve doesn’t embody all that much more easing now - - a partial chance of one.”
Swaps traders are betting on a 56 percent chance that the RBA will hold the cash-rate unchanged through July, with 44 percent odds of at least one reduction in borrowing costs, data compiled by Bloomberg show.
The Australian dollar surged almost 50 percent against the U.S. currency from 2009 to 2012, making exports less competitive and boosting the appeal of imports. It dropped in 2013 as the economy grew below its average pace for the past 10 years, prompting the RBA to cut rates to support demand.
“The governor has provided a target for the Australian dollar on the downside, given his assertion that 85 U.S. cents would be ‘closer to the mark,’” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “This is an important development, and while the governor notes that it is difficult to suggest a target with any precision, it should be taken as a strong signal that the move from 96.50 U.S. cents to 90.50 U.S. cents isn’t yet sufficient for policy makers.”
Stevens’s hand was reinforced in October when the government pledged to inject A$8.8 billion ($7.9 billion) into the RBA’s reserve fund.
Prime Minister Tony Abbott weighed in to the debate in parliament yesterday, saying the extra capital “enables the Reserve Bank to intervene prudently and appropriately in the market to try to insure that the Australian dollar is at the best possible level.”
In the interview, Stevens made a distinction between Australia’s economic environment and the one faced by the Swiss National Bank, which sought to stem a rising currency by imposing a franc ceiling of 1.20 versus the euro in September 2011.
“While one would never want to rule out any particular technique, I think it’s unlikely we’re going to face the need to do what the Swiss have done,” Stevens said, according to the paper’s transcript of the interview. “But we certainly didn’t ever want to rule out conventional intervention.”
Stevens also told the Financial Review he hopes the U.S. Federal Reserve is in a position to taper its monetary stimulus, policy known as quantitative easing, “before too much longer.”
“When they get to the point where they can do that or begin that, that’s actually a good news story,” he said. “It will be disruptive around financial markets around the world, and it may put pressure on various countries, as we’ve seen -- we have had a preview of that earlier in the year -- but I think when the U.S. can start what I think will be a long journey back towards something more normal I think that’s actually a good thing.”
--With assistance from Daniel Petrie in Sydney. Editors: Garfield Reynolds, Malcolm Scott