"With growth currently on the soft side, the real exchange rate still overvalued and weighing on the non-mining sector, and inflation within the target range, monetary policy should remain accommodative"
- The International Monetary Fund
For months analysts and economists, as well as Australian policymakers have been expressing their concerns over the strength of the Australian Dollar that has become a serious drag on the Australian economy. Nevertheless, none of them has emphasised by how much the currency is actually overvalued.
On Thursday, the International Monetary Fund said that the Reserve Bank of Australia should keep its easy monetary policy, as the Aussie is about 10% overvalued and weighing on economic growth. The IMF also pointed out that earlier interest rate adjustments have definitely contributed to the growth; however, they cannot engineer a significant drop of the currency. With interest rate currently at 2.5%, the RBA still has room to respond in case growth outlook worsens. Despite the fact they have cut borrowing costs by 2.25% since late 2011, the key refinancing rate is still substantially higher that in comparison with U.S., Europe, U.K. or Japan, where policymakers do not exclude a possibility of introduction of negative interest rates.
The Aussie has gained about 50% during the last four years, as the economy escaped the 2009 global recession. On Thursday the AUD/USD fluctuated at 0.926, at level more than 20% higher than its 20-year average, even despite a 10% drop this year.
© Dukascopy Bank SA