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Desperate for ideas to get the economy moving, the RBA turns its gaze on a weaker Aussie dollar

Jack Derwin
  • The Reserve Bank has forecast the different impacts a weak Aussie dollar would have on the ailing Australian economy, in its November monetary policy statement.
  • The RBA is hopeful a lower dollar would help create jobs, and raise inflation and GDP.
  • However, economists believe the impact would be far more muted, although they concede it could happen with unconventional monetary policy.

The Reserve Bank has been longing for a hand to get the economy heaving again.

With the government neglecting to help out, and interest rates nearing their limit, Australia's central bank has found itself scraping the bottom of the barrel for ideas. Now, examining its November statement on monetary policy, it looks like it might have found one possible strategy.

"Interesting modelling from the [the] RBA – it clearly hopes the Australian dollar can ‘fix’ the economy," IFM Investor economist Alex Joiner tweeted on Friday. "Not too sure it can get it much lower unless it foreshadows the unconventional."

A lower Australian dollar generally helps the economy along in a couple of ways. Firstly, it makes Australian exports much cheaper to the rest of the world, with trade partners typically buying more as a result, injecting some much-needed cash into the economy.

Secondly, it helps from the RBA's perspective because it pushes up the prices of the goods we import, meaning we shell over more Aussie dollars for the same products. While that sounds counter-intuitive, it helps push up the price of consumer items, which are used to measure inflation. As those prices go north, so does inflation.

Typically, interest rate cuts help push the dollar lower. However, that only works in isolation. As central banks around the world do the same in response to a global economic slowdown, each country nullifies the rate cuts we've seen at home. With rates at 0.75% and expectation being there may only be one more cut to come, there's not really any room to move for the RBA.

This is what Joiner alludes to when he says the Australian dollar can't get much lower. That is unless the RBA goes unconventional, and begins inflating the money supply via quantitative easing (QE) or taking interest rates to 0% or even negative. That could give the Australian dollar a battering as it shocks the market and the dollar is devalued through increased supply.

READ MORE: The RBA has just revealed what it needs to unleash quantitative easing and negative interest rates in Australia for the first time

Even if it did unleash unconventional policies though, it's not a perfect solution.

"The depreciation in recent years hasn’t improved economic parameters materially, particularly inflation where tradeable ex-volatile items [haven’t] accelerated as much as models anticipated," Joiner said.

In other words, Joiner not only thinks the RBA can't really get the dollar much lower but that if it does, it won't help much anyhow.

That leaves the RBA in a tight spot. On one hand, it's forecasting the economy will largely pick up by itself, although admits Australia will never get to full employment at 4.5%.

On the other, its forecasts have been notoriously wrong before.

Image: RBA