Dollar still 'uncomfortably high'

The Reserve Bank has expressed cautious optimism about the economy as it kept the cash rate on hold in an expected move.
By · 6 Nov 2013
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6 Nov 2013
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The Reserve Bank has expressed cautious optimism about the economy as it kept the cash rate on hold in an expected move.

However, it warned the exchange rate was "still uncomfortably high".

The RBA was hopeful growth in the non-mining sectors was improving in the low interest-rate environment. Analysts said the central bank could be reaching the end of its monetary-easing cycle.

The Australian dollar slipped more than a quarter of a cent after the statement on Tuesday, falling to US94.68¢ from US95¢.

RBA governor Glenn Stevens said in the medium term, "private demand outside the mining sector is expected to increase at a faster pace", although the outlook was still uncertain.

He added that housing and equity markets had strengthened and would eventually be supportive of investment.

Mr Stevens continued to highlight the need for a lower exchange rate in what Westpac chief economist Bill Evans said appeared to be a tactical move to ease pressure on the dollar.

"The Australian dollar, while below its level earlier in the year, is still uncomfortably high," Mr Stevens said. "A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy."

The RBA has increased its comments about the strength of the dollar in recent weeks. The currency has risen from a year's low of just below US90¢ in late August.

Last week, Mr Stevens said the dollar was not supported by the costs and productivity in the economy, adding that the terms of trade were also more likely to fall than rise.

While the RBA statement was light on guidance, analysts said Friday's Statement of Monetary Policy and the minutes of the meeting could provide a better gauge on what the Reserve would be keeping an eye on in the next few months. The SOMP is also expected to give updated growth and inflation forecasts.

"The communications strategy now in place involves leaving the door open to further rate cuts but making it clear that the preference is for any further easing in monetary conditions come via a lower Australian dollar," CBA chief economist Michael Blythe said.

The bank has been reducing the cash rate since November 2011 in an effort to stimulate the economy as mining investment peaks.

Expectations for the first interest rate cut since August had been low, and fell further after figures released on Monday pointed to stronger-than-expected retail spending in September and a continued rise in house prices.

New home building approvals are up by a stronger-than-expected 14.4 per cent in September.

Economists are also turning their attention to the release of the October jobless numbers on Thursday. The jobless rate was 5.8 per cent in August.
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