The RBA is an exception

Yesterday I illustrated with the Riksbank and the Fed that most central banks were acting alike. But as usual, there are exceptions to the rule!

I was interested in this WSJ article on Australia: “In Australia, Central Bank Intervention Can’t Be Ruled Out”:

Australia’s central bank appears to be stepping back from hints that it might intervene to bring down the level of the local dollar — but the option can’t be ruled out entirely.

Reserve Bank of Australia Deputy Gov. Phillip Lowe told a conference Tuesday that the threshold for intervention — in which the RBA would actively sell the Aussie dollar and buy foreign currency — was still “fairly high.”

To be sure, some of the shine already has come off the currency, which is down about 12% against the U.S. dollar so far this year. But it has made back significant ground since its late-August nadir and remains strong in historical terms, aided by a positive interest-rate differential with the United States and Australia’s relatively strong economic fundamentals and AAA credit rating.

Aside from rhetoric, the RBA appears to have few arrows left in its quiver. The bank has cut rates eight times since late 2011 to counteract a decline in Chinese demand for Australian minerals and ores, which has helped to revive local spending.

But cutting further could be difficult. The RBA has held rates steady its last few meetings, mindful of further pushing up house prices, which already are growing strongly.

That has left the central bank with few options other than talking the currency down. The unusual hints of intervention — the RBA hasn’t intervened since October 2008, just after the Lehman Brothers collapse — may indicate exasperation that previous jawboning has had only limited impact.

Expect the jawboning to become shrill if the Aussie dollar rallies again. And if all else fails, intervention itself can’t be ruled out.

Among the developed economies, Australia last saw a recession in 1991. The 2008-09 international crisis just ‘passed it by’ (as had the Asia crisis of a decade earlier)! So Australia has not been involved in situations of the sort “if all else fails…”

The chart indicates that Australia has mostly followed the so called “export (commodity) price norm, where the exchange rate fluctuates with commodity prices. Note that between early 2012 and early 2013, while commodity prices fell the Aus$/USD exchange rate remained relatively put. That´s akin to monetary policy tightening,

Australia exception_1

The charts below picture NGDP and the trend, the policy rate and inflation. Just before the crisis hit, monetary policy in Australia was “easy”, despite the rise in the policy rate. I say that because NGDP was rising above trend (growing above the trend rate). Inflation also rose.

Australia exception_2

Australia exception_3

By tightening monetary policy during 2012 (again, despite falling rates), the RBA managed to bring NGDP back to trend. It will be successful if it keeps it there. Compared to other central banks, who have managed to let NGDP fall (and remain) far below trend, that´s no mean feat. And note that inflation has not taken off, remaining very close to the target, also something the Fed or the Riksbank have not accomplished!

Note that Australia is far away from any “ZLB”. Also, there´s a lot of talk of “Secular Stagnation”, reflected in decades long fall in bond yields. The chart shows long term government bond yields for Australia and the US, but no one´s heard of “secular stagnation” in Australia!

Australia exception_4

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