Reserve Bank of Australia High Intervention Threshold

By TraderVox.com

Tradervox.com (Dublin) – The Reserve Bank of Australia’s threshold for intervening to temper with the gains in the local dollar is “quite high” according to officials who are monitoring the impact of a stronger currency on the labor market. The Deputy Governor of RBA Philip Lowe indicated today. Further, he added that it is tricky to make a sturdy case against the exchange rate that has been maintained by the central bank. The nation’s strong economy status has affected the decision of the RBA officials to keep the intervention hurdle quite high.

The Aussie has been the best performer for the last six months among a group of ten currencies. The good economic status has been boosted by investment in the mining industry which has grown tremendously. In turn, the Reserve Bank of Australia has maintained the highest benchmark rate among all major developed economies. Lowe said that the high interest rate is an indication of the country’s high terms of trade and a measure of export prices relative to import cost.

Against the US dollar, the Australian dollar was little unchanged at $1.0550 which is close to six weeks low. Yesterday, the Aussie registered its weakest level at $1.0525 since January 26. The Reserve Bank of Australia maintained the interest rates at 4.25 percent for the second month as it noted that it has capacity to reduce borrowing costs as Europe remains a possible source of shocks.

Lowe also said in a report that the persistent increase in the unemployment rate suggests that contractionary effect of the high exchange rate is offsetting the expansionary effect of the investment boom. He indicated that if this turns out to be true, the monetary policy would be able to respond as far as inflation outlook remained positive.

Lowe also defended the high interest rates claiming that this is what is needed to maintain macroeconomic stability. He also added that the high interest rate and exchange rate in relation to the rest of the world are influenced by the fact that Australian economy is benefiting from the chance in the world relative prices.

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