Australian dollar still too high, says IMF

Australian dollar still too high, says IMF article image

The Australian dollar is too high and needs to come down by as much as 10 per cent, according to the International Monetary Fund.  

In a report on Australia released last week the IMF says the exchange rate is 20 per cent above its post-float average – and 5-10% higher than it should be.  

The report was prepared at a time when the Australian dollar was trading at US89¢.  

The IMF model suggests the dollar should be between US80¢ and US85¢, which is also the range identified by Reserve Bank board member Heather Ridout in January as the
"magic spot" that would allow exporters to compete.  

Earlier this week, Toyota nominated high costs and the "unfavourable Australian dollar" as two of the reasons it planned to stop making cars in Australia. A lower dollar along the lines suggested by the IMF would have substantially cut its costs.  

"Australia's floating exchange rate has been a vital shock absorber for the economy during the upswing of the mining investment boom," the IMF staff report says. But throughout 2012 and early 2013 as minerals prices fell, "the exchange rate did not depreciate as would normally be expected."  

Market intervention  

The report says the dollar has been kept high by capital inflows to fund mining investment, relatively high Australian interest rates and a keenness on the part of foreign investors to hold Australian assets.  

It says government officials have expressed surprise that the exchange rate has remained as high as it has and Reserve Bank staff have told it that market intervention remains "part of the policy toolkit, although more recently used only at times of market dysfunction".  

Without a fall in the dollar, Australia will find it hard to get the non-mining investment it will need as mining investment collapses.  

The report says mining-related investment has been responsible for almost half of Australia's economic growth. It expects that to halve as a proportion of GDP.  

Low interest rates needed  

It nominates high household savings and "relatively weak consumer sentiment" as other drags on growth and says living standards will stagnate without productivity improvements.  

It believes interest rates will need to stay low, although it notes the RBA cash rate of 2.5 per cent is now so low as to give it limited scope to deal with further economic shocks. It says the government should be prepared to "temper the pace of budget deficit reduction" if needed.  

"Australia's modest public debt gives the authorities scope to delay their planned return to surpluses in the event of a sharp deterioration in the economic outlook," the report says.  

Without big increases in revenue returning the budget to surplus would require "sizable cuts in projected spending".  

Treasurer Joe Hockey welcomed the report saying its projections were consistent with those in the government's December budget update.  

"The message reinforces the government's position that difficult decisions will need to be made in order to put the budget back on a sustainable path," he said. "Improving productivity will be a key challenge." 

Source: Sydney Morning Herald


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