Prime Minister Tony Abbott has backed RBA governor Glenn Stevens’ comments indicating he would prefer an Australian dollar closer to 85 cents.
Prime Minister Tony Abbott is comfortable with the central bank governor airing his views on the Australian dollar, even though he says the market should generally be left to determine the currency’s value.
Reserve Bank of Australia governor Glenn Stevens has indicated he would prefer to see the dollar closer to 85 US cents than 95 US cents, given a falling terms of trade.
He told the Australian Financial Review on Friday that, if things over the medium term evolve as the bank assumes, it would be surprising if “a nine at the front is the right number”.
Quizzed on the comment, Mr Abbott said the market should determine the value of the dollar and doesn’t believe anyone should try to buck the market.
“That doesn’t mean the Reserve Bank shouldn’t from time to time prudently involve itself in the market to encourage what it thinks is the right market developments,” Mr Abbott told reporters in Canberra.
“I’m very comfortable with what the governor has to say.”
National Australian Bank chief economist Rob Henderson said Mr Stevens’ comments were one factor that drove the dollar to a three-month low below 90 US cents on Friday.
He said Mr Abbott had implied in parliament on Thursday that the central bank might use its recent $8.8 billion grant from the government to top up its reserves to “intervene prudently and appropriately in the market”.
Mr Henderson said Thursday’s rise in the unemployment rate from 5.7 per cent to 5.8 per cent was also reminder that the RBA could still cut the cash rate again.
A high dollar was cited as a reason for US General Motors’ decision this week to end Holden car production by the end of 2017.
Mr Stevens will probably face further interrogation on the dollar when he fronts a parliamentary committee on Wednesday.
Ahead of the mid-year budget review next Tuesday, the RBA governor also warned against “very aggressive” discretionary spending cuts to achieve a short-term federal budget surplus.
Treasurer Joe Hockey has warned that new Treasury forecasts will show the economy locked below trend growth and rising unemployment.
Westpac economists expect the 2013/14 budget could be around $43 billion rather than the $30.1 billion forecast by Treasury in August, not least as a result of the RBA’s $8.8 billion capital injection.
They also expect government debt to peak at $420 billion in 2016/17, a $50 billion deterioration since Treasury’s last forecast in August.
ANZ senior economist Cherelle Murphy is forecasting an even bleaker outcome given the government has indicated it is unlikely to take immediate action to correct the slippage in the deficit.
Mr Hockey has said the mid-year economic and fiscal outlook will be his “starting point”.
As such, Ms Murphy estimates the deficit could be close to $50 billion in 2013/14.
She also expects peak government could exceed $500 billion in 2016/17.
Parliament passed legislation this week that scrapped the previous debt limit of $300 billion after Mr Hockey struck a deal with the Australian Greens.