Monday, 18 March 2013

The one eyed central banker

Interesting statements from Deputy RBA governor Phillip Lowe that high AUD has been a boon for Australia.  In classical theory a high currency slows imports and curbs inflation.  But this analysis ignores hot money flows and asset bubbles....

..."Had we not experienced the sizeable appreciation (in the value of the Australian dollar) over recent years, it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates," he told an economics forum in Sydney on Tuesday...

Well possibly, but globally inflation is low and interest rates are at rock bottom and the rest of the world...

...."At the moment though, the available evidence does suggest that lower interest rates are doing their work broadly as expected." (here)

This is a very narrow analysis.  Will Dr Lowe agree with this analysis when the hot money recedes, the currency drops and low interest rates fail to stimulate as is occurring elsewhere?

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