Swan: Low RBA rates possible due to AUD strength

Australia’s economy can operate with lower interest rates than it has in the past as overseas investors buttress the local currency that is helping contain inflation, Treasurer Wayne Swan said.

“Australia is now seen as a necessary part of any portfolio, whether it be private or public investors — and these investment flows have propped up our sustained high dollar,” Swan said in a speech in Melbourne yesterday. “This, combined with our fiscal consolidation and contained inflation, has all meant that our economy has more room to run lower rates than we have in the past.”

By highlighting the benefits of an elevated local dollar, Swan is pivoting from his past concern about the impact of its strength on industries including manufacturing and tourism. The change of focus coincides with a rebound in the government’s ratings in opinion polls and follows the steepest rate cuts among major developed economies in the past year.

Swan and other ministers have pressed the central bank to lower borrowing costs and stimulate the economy as the government bids for a A$44 billion ($46 billion) swing back to the black in time for an election due by late next year.

There has been “a rebalancing in monetary and fiscal policy, which has not been widely remarked upon,” Swan said in the speech to the 2012 Economic and Social Outlook conference before he heads to a Group of 20 meeting in Mexico.

Prime Minister Julia Gillard’s government is benefiting from lower borrowing costs in an economy where about 90 percent of mortgages have floating rates.

Australia’s core consumer prices rose an average 2.5 percent last quarter from a year earlier, in the middle of the central bank’s target range, a government report showed last month. The nation’s unemployment rate was 5.4 percent in September.

Australia has lost 37,000 manufacturing jobs in the past two years and 70,000 in construction in the past 12 months as the currency’s strength, fueled by investors seeking exposure to China’s demand for resources, lowers import costs.

RBA Deputy Governor Philip Lowe this week addressed the connection between his nation’s elevated currency and higher returns available relative to economies such as the U.S. and Europe where rates are near zero.

The local dollar, which has surged 54 percent in the past four years, traded at $1.0404 at 9:13 a.m. in Sydney.

Via – Bloomberg

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