The Reserve Bank of Australia said the nation’s economy is set to remain subdued and warned Japan’s monetary policy could spur flows that support the local dollar.
“Gross domestic product growth is still expected to be below trend until mid-2015,” the RBA said in its quarterly monetary policy statement in Sydney today, leaving its growth forecasts largely unchanged. Capital flows from Japan seeking higher yields “could hold the Australian dollar at a higher level than real economic fundamentals would imply,” it said.
Policy makers are fretting over a disconnect between falling commodity prices, led by a more than 40 percent drop in iron ore, and the currency. The RBA forecast the terms of trade, or export prices compared to import prices, will fall about 4 percent over the rest of 2014 and early 2015.
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