In a recent interview, RBA governor Glenn Stevens suggested the Australian dollar might fall to US75 cents in 2015. And he intimated that it wouldn’t be a bad thing.
In a recent interview, RBA governor Glenn Stevens suggested the Australian dollar might fall to US75 cents in 2015. And he intimated that it wouldn’t be a bad thing.
A lower exchange rate makes our exports cheaper for the foreigners who buy them, and that increases demand for our exports.
Good news for resources exporters and even universities, with education Australia’s third largest export.
Because labour is paid in Australian dollars, any depreciation in the exchange rate should increase revenues, but not costs per unit of output – so profit goes up.
It is this effect that people typically highlight as a positive of a lower exchange rate in a small, open economy such as Australia’s.
What is all too often glossed over is the impact on imports – a depreciating currency makes them more expensive.
Mr Stevens is reportedly well aware of this, pointing out recently that we would all be having more holidays at home as a result.
“The price of petrol at the pump, which is falling at the moment, in Australia won’t fall quite as much as it might in America … for most of us the most direct impact is our purchasing power over foreign goodies is not as high as it was,” Mr Stevens said.
“Foreign goodies”? Goodbye Aspen, hello Thredbo? No big deal?
Actually, it may be a much bigger deal than he seems to think.
No, the Aspen ski trip-effect is not the issue.
It’s the fact that we import a lot of high-cost consumer durables and business inputs.
When the price of durables, like flat-screen televisions and computers goes up, and there are no close domestic substitutes, people delay their purchases.
This makes consumers worse off than they would have been, but it also imposes a big hit on the retail sector.
This might all seem like esoteric stuff (so you get a fridge with an internet connection a few years later than you otherwise would), but consumer confidence is incredibly important because of the negative feedback loop that ensues when it falls.
That is why Treasurer Joe Hockey is constantly at pains to emphasise that Australian consumers should be confident.
Even Mr Stevens highlights the importance of consumer confidence on a regular basis.
The impact on business inputs is also important.
A rise in the cost of inputs is a direct hit on the competitiveness of our exporters.
And when the final goods are sold domestically, the input price hit eventually translates into higher prices, also hurting consumers.
Mr Stevens is plainly trying to manage many different things – inflation, economic growth, housing prices, and the Australian dollar.
And the cash rate is the only tool at his disposal.
Given low inflationary pressures because of constrained wage growth, a housing market that seems to be cooling, and economic growth still under threat, a rate cut (or two) seemed plausible.
With Mr Stevens’s desire to see a lower dollar –something a rate cut encourages – cuts seemed highly likely.
But with the dollar falling because of the plunging iron ore price, maybe not so much.
Conventional wisdom is that a lower Aussie dollar is good news for exporters. It is.
But it’s bad news for consumers and business that source inputs from abroad. And, it seems, it’s bad news for home owners and businesses that borrow.
This story was originally published in The Conversation
