RBA Assistant Governor, Christopher Kent, gave a speech this morning looking at the implications of the resources boom for the Australian dollar (AUD).
In the speech, Kent explains the main factors driving the AUD, including the unwinding of the resources boom and central bank money printing. Overall, he is not surprised that the dollar has depreciated given the fall in commodity prices and the terms-of-trade. However, he also argues that the prospect of improved growth in the US, along with the tapering of the Federal Reserve’s bond buying program, had also helped drive down the AUD.
Kent also explains how a lower exchange rate would “assist in achieving balanced growth in the economy and bring about a quicker return to trend growth”. He also acknowledges the impact of the lower AUD on inflation, saying that it would “also add a little to inflation, for a time” and that “on present indications, inflation is expected to be somewhat higher than we’d thought in November, in part because of the further depreciation since then, but it is still expected to remain consistent with the inflation target“.
The speech also notes the big hit to jobs and incomes as large LNG projects come to completion, exacerbated by the fact that they are largely foreign owned:
While LNG projects require a substantial number of Australian workers to help put the new extraction, processing and transport facilities in place, they require relatively few workers during the production phase…
This means that less revenue from the sale of resource exports will accrue to Australian residents in the form of wages than would have been the case if more of the investment had been focused on other commodities.
I am having technical issues at the moment, so cannot upload the speech. But for those that want to read it, you can find it here.
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