Glenn Stevens was careful in his final interview as governor to downplay the exchange rate’s role in the transmission of monetary policy. Photo: Louie DouvisThere’s more than a little irony in at least some of the Australian dollar’s latest gyrations being attributed to Reserve Bank governor Glenn Stevens’ exit interview. He actually dissed monetary policy’s exchange rate power.
While the Australian dollar’s relative strength remains a constant concern for the RBA, at various times over the years the bank has tried to explain that it doesn’t move interest rates to specifically move the Aussie.
Yes, lowering interest rates and judicious use of the governor’s jawbone have had an impact, but Stevens was careful in his final interview as governor with Fairfax Media to downplay the exchange rate’s role in the transmission of monetary policy.
Asked specifically how much of monetary policy’s stimulus comes through its effect on the exchange rate, Stevens said:
“It’s very hard to be precise, because there are so many other things affecting the exchange rate, so identifying the interest rate effect is, you know, really a mug’s game, I think. But I guess I have to believe that having lowered the cash rate for five years, and also made the odd comment, exchange rate is lower than it was going to be otherwise. The terms of trade are taking it down as well. How much of that’s the interest rate? Impossible to be precise.”
The RBA view has been that the exchange rate movements follow the thrust of why monetary policy is moved, rather than just the actual interest rate adjustment. Obviously it all goes into the mix, as the governor implies, but trying to be specific about it is indeed a mug’s game.
Much, maybe most, market commentary has never accepted that. Time and again in this cycle, the commentariat has called for a rate cut or explained one as being necessary to lower the dollar. And when the Aussie has proceeded to go on its own sweet way despite a rate move, that argument gets put away until the next RBA meeting.
In his farewell interview, Stevens revisited a key point from his final speech about the burden of monetary policy stimulus falling on households:
“I think most of the domestic effects of cheap money comes through the household sector. Higher house prices than otherwise, more borrowing than otherwise, wealth effects, lower saving rate, etc, etc. That’s where I suspect the bulk of the domestic demand impetus comes from.
“It doesn’t come from businesses saying: ‘Quarter point less on funding costs relative to my hurdle rate. I’m now going to do the project.’ You know, there’s no evidence that that occurs or ever did. So it comes from the households. And as you know, the thing that I’ve tried to grapple with is – that’s where we get the effects, but do we actually want households to engage in a major levering-up from here. It’s not that what they did before was disastrous. That clearly hasn’t been. But from here how much more do you want?”
And that’s why Stevens has urged governments to borrow more to invest in the nation while still needing to rein in its recurrent budget deficit.
As to some perspective on Stevens’ RBA stewardship, at his farewell dinner on Tuesday, one of the fathers of modern Australian finance remarked how rare and pleasurable it was to be at a function for an institution that was held in near-universal respect. By implication, it’s hard to think of any other.
I began the week in this space previewing Australia’s incredible achievement of cracking the ton, of scoring 100 consecutive quarters of GDP growth, not out. That success had many fathers, as success tends to, but certainly there in the delivery room has been the RBA.
We are indeed fortunate to have such a fine central bank, a credit above all to its culture of service and intellectual honesty. That culture has both provided and nurtured by several decades of fine leadership, none better than that of Glenn Stevens.
It’s not entirely coincidental that for 20 of our 25 years of unbroken growth, Stevens has been a, or the, key player in our monetary policy. As the governor-designate, Philip Lowe, recounted on Tuesday, Stevens has attended 215 RBA board meetings – for 10 years as governor, for five years as deputy governor and for five years as chief economic adviser to the board.
Lowe’s speech was comprehensive, but I think the core of it about Stevens the man was this:
“Those of you who don’t know him might feel like you do: there are few Australians whose public utterances are so closely scrutinised and so widely covered by our media. But whether you know him personally, or through the media, I am sure you will have formed the same impression of Glenn.
“That is of an incredibly dedicated servant of the public over a career that spans 36 years, and a man of the highest integrity.
“Glenn has relentlessly served the interests of the Australian people. He has brought a very high level of analytical rigour to the task. He has exercised an independence of thought that is not always seen in public life. He has patiently explained difficult economic issues to Australians. He has talked to us about the challenges that Australia faces, but also the opportunities we have.
“In a world where optimism has sometimes been in short supply, he has more than once reminded us that the glass is at least half full. He has been deliberate, logical, thoughtful and measured in his remarks. He has done this all without fear or favour. He is a man of courage, prepared to say things that are true, even when they are not popular. And last – but not least – he helped successfully navigate our economy through the biggest resources boom in a century and a global financial crisis.”
And given his chance to reply, Stevens was quick to deflect credit to the many relatively anonymous workers at the RBA.
We have been fortunate to have him as governor and to have our central bank continue with its culture intact.