Reserve Bank Governor Glenn Stevens
The head of Reserve Bank appearing before the House of Representatives Economics Committee.
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Reserve Bank governor Glenn Stevens says the Australian dollar is ''too high'', but not so overvalued that it would justify major intervention.
Mr Stevens told the House of Representatives Standing Committee for Economics this morning that while the dollar was ''somewhat overvalued'', a central bank would have to be very confident its currency was ''seriously overvalued'' before contemplating major intervention.
''It is too high ... on the best metrics that I have available to me, but we are not talking 50 per cent,'' he said, adding that it was ''a bit surprising it hasn't come down''.
''The evidence of history is that if it is overvalued by a long way it is going to come down.''
Mr Stevens added that he was comfortable with the market settings for the dollar and that over history, the markets have been setting prices ''better than we would have had it''.
''The float has served us well and will continue to do so overall.''
Mr Stevens said in a prepared statement earlier that the higher-than-expected exchange rate ''has been a relevant factor in the setting of interest rates''.
''It is not that interest rates are seeking a particular exchange rate response, but they are being set with a recognition of the exchange rate's effect on the economy,'' he said.
He said the reduction in the cash rate by 175 points since November 2011 meant that there was ''a good deal of interest rate stimulus in the pipeline''.
While there was scope to ease interest rates further given the subdued inflation outlook, the Board had decided it was ''prudent to sit still'', Mr Stevens added during the Canberra hearing.
But Mr Stevens would not rule out changing the cash rate in the lead-up to the election, saying that the Reserve Bank ''has to do its job'' every month.
''If interest rates have to be changed, then they will be changed,'' he told the parliamentary committee.
He added later that the Reserve Bank was still maintaining a bias to ease at this time.
CommSec economist Savanth Sebastian said Mr Stevens' statement to the committee today was his clearest indication that interest rates would remain on hold till the middle of 2013 and perhaps later.
''His comments today provided more clarity and reinforced our view that interest rates are solidly on hold in the near term – especially given that the 'substantial' stimulus measures are having an impact on the economy.
''There is certainly no perception that the Reserve Bank maintains either an overly optimistic or overly pessimistic view. … But the Reserve Bank Governor believes we are in a happy place.''
Mr Stevens also said that he expected investment in the mining sector to peak soon, though it would remain at elevated levels for some time.
''Looking ahead, it appears that the peak in the level of resource sector investment is now close,'' Mr Stevens said.
''It is a very high peak, but we do not think that there will be a rapid decline in the near term after the peak.''
He said investment spending in other parts of the economy remained subdued but would strengthen following the peak in the mining sector.
''Investment spending by businesses in other sectors has thus far remained somewhat subdued in comparison,'' he said.
''There are good reasons to expect it will strengthen in due course, but the available indicators at present do not suggest that is going to happen in the very near term.''
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