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High $A keeping rates low, says RBA

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AAP

2013-02-22

The bad news is the Australian dollar is overvalued, the good news is it's helping to keep interest rates low.

Reserve Bank of Australia (RBA) governor Glenn Stevens on Friday admitted the currency was "too high" but said its persistently high value helped keep the cash rate down.

"If you were to ask me: `is the cash rate lower than it would have otherwise been?', the answer is yes," Mr Stevens said in his twice yearly appearance before the federal parliamentary economics committee.

The Australian dollar is currently trading around 103 US cents, and has been trading around that level for most of the past two years.

Mr Stevens said the rise in the currency had helped offset the surge in investment in the mining industry, which would otherwise have led to higher interest rates.

"We've had a once in a century investment boom and we've come through that with interest rates now lower than average," he said.

"That sounds very unlikely, so how did that happen?

"Well, the exchange rate is actually a big part of how that happened."

The RBA cut the cash rate by 1.75 percentage points between November 2011 and December 2012.

It kept the rate on hold in February at three per cent, equal to its lowest level since the global financial crisis.

Mr Stevens said the RBA had an easing bias, meaning it believed it was more likely to cut the cash rate again over the next few months than raise it.

"It's fair to say that we have maintained a bias to ease at the moment," he said.

While the RBA has no plans to intervene in currency markets to push the Australian dollar lower, Mr Stevens acknowledged the high value of the currency was hurting exporters.

"To date, here my sense is that it is too high ... but we're not talking 50 per cent or something like that," he said.

"(But) you need to be pretty confident that it is seriously overvalued and that the market is behaving in some irrational way before you would launch a large-scale intervention," he said.

He said markets generally did a better job of setting exchange rates than central banks.

"Markets are irrational much of the time, but somehow over the broad sweep of history they have done a better job setting that price than we would have done if we'd been trying to set it."

Evan Schwarten