Overpriced Aussie set for fall, says RBA
He also said the dollar was likely to fall "materially" at some point in the future, although he was not specific.
"The terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today."
The local currency fell on his comments, shedding more than a quarter of a cent from US95.75¢ to about US95.40¢. The dollar continued its slide later in the day, and was buying US95.09¢ late on Tuesday.
Mr Stevens' comments on preferring a lower dollar are not new, although they have come after a brief period in which the RBA appeared to be more comfortable with its recent elevated levels.
Separately Mr Stevens sounded an upbeat note about the state of the world economy, saying a recent meeting of global policymakers in Washington had a "distinctly more relaxed tone" than at similar meetings earlier this year. The US economy appeared to be "healing", Chinese economic activity looked "robust" and sentiment in Australia had improved in the past year, he said.
And though it was too early to signal "great concern" about recent country-wide house price rises, he singled out for attention the Sydney property market, where the rate of finance approvals has increased more than 40 per cent in the last year, warning banks and home buyers not to get ahead of themselves.
Speaking at a Sydney conference, Mr Stevens said global policymakers appeared relatively relaxed about the state of the global economy last month at a meeting in Washington. He did not think recent dynamics in the Australian property market were "worrying" because some house price rises were part of the "normal cyclical dynamic".
"My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn't something to complain about too quickly.
"Lenders and borrowers alike would be well advised to take due care ... it is very important that strong lending standards remain in place, and that decisions be based on sensible assumptions about future returns."
His comments about Australia's property market were echoed by the chairman of bank regulator Australian Prudential Regulation Authority, John Laker, who warned that home owners should not expect the current low interest rates to last forever.
"Housing markets have been heating up in some capitals and, no doubt, temptations may be growing, [but] let me help you to resist their siren song," Mr Laker said.
"Markets may be expecting low interest rates to last for some time. However, interest rates have a cyclical pattern and when Australia's economic circumstances require, they will rise."
Some economists said it was clear from Mr Stevens' views about the global outlook that Australia's rate-cutting cycle was near the bottom. "We do not expect the RBA to cut the cash rate again in the current cycle," Commonwealth Bank economist Michael Workman said.
"[But] short-term interest rates look likely to stay at their current low levels for an unusually long period, possibly until late next year given the benign inflation and soft labour forecasts that predominate."
Frequently Asked Questions about this Article…
The Reserve Bank of Australia believes the Aussie dollar is overpriced because its current value above US95¢ lacks support from economic fundamentals. Governor Glenn Stevens has indicated that the terms of trade are likely to fall, suggesting that the dollar will be materially lower in the future.
Glenn Stevens' comments about the Australian dollar being overpriced led to a drop in its value. The local currency fell more than a quarter of a cent from US95.75¢ to about US95.40¢, continuing its slide later in the day.
The global economic outlook appears positive, with the US economy 'healing' and Chinese economic activity looking 'robust.' This improved sentiment has positively influenced the Australian economy, as noted by Glenn Stevens.
While some rise in housing prices is seen as part of the normal cyclical dynamic, there are concerns about the Sydney property market, where finance approvals have increased significantly. Both Glenn Stevens and John Laker have warned against expecting current low interest rates to last forever and advised maintaining strong lending standards.
Interest rates in Australia are not expected to rise immediately. Economists believe the rate-cutting cycle is near the bottom, and short-term interest rates are likely to remain low for an unusually long period due to benign inflation and soft labor forecasts.
Lenders and borrowers are advised to exercise caution and ensure that strong lending standards remain in place. Decisions should be based on sensible assumptions about future returns, as emphasized by Glenn Stevens.
The Reserve Bank of Australia views recent house price rises as part of the normal cyclical dynamic, which can improve the incentive to build. However, they caution against getting ahead of themselves, particularly in the heated Sydney market.
Economists, including those from the Commonwealth Bank, do not expect the Reserve Bank of Australia to cut the cash rate further in the current cycle. Short-term interest rates are expected to stay low for an extended period due to current economic conditions.