ELIZABETH KNIGHT July 12, 2012
Demand for the Australian dollar in financial markets could artificially push up the value of the currency, the nation's central bank warns.
Reserve Bank of Australia deputy governor Dr Philip Lowe said that the flow of money into the country could keep the currency higher than the state of the economy justified.
"We could face the issue where the currency is high, purely for financial reasons and not because of the fundamentals of the underlying economy," Dr Lowe told a forum in Sydney.
Dr Lowe's comments come hours after the dollar rose to fresh record highs against the euro of almost 84 euro cents, and advanced against other currencies overnight.
However, Dr Lowe did not believe the currency was currently overvalued.
‘‘When you have a very high terms of trade and a once-in-a-century investment boom you are going to have a high exchange rate.‘‘Where the currency is at the moment, it is hard to make a strong case that it is fundamentally overvalued.’’
Asked about the role of monetary policy on assisting Australia deal with structural change, Dr Lowe said the best thing the RBA could do was keep inflation under control and rates were not the best tool to deal with such change.
Dr Lowe also said credit growth in Australia was running in line with household incomes, a more sustainable position than in the last decade when it grew much faster.
Dr Lowe added the uncertainty about the European debt crisis was impacting on households and business across the globe and the situation was unlikely to improve anytime soon.
AAP, with BusinessDay, Reuters