MNI INSIGHT: RBA Unfazed By AUD Rally, Recovery On Track

--RBA Still Unconvinced By Negative Rates, Sees Other CBs Jawboning

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia is unconcerned by the sharp

rally by the Australian dollar in recent months, with its appreciation from 55

U.S. cents to 70 cents so far failing to derail the economy's recovery from its

trough in the early weeks of the Covid-19 crisis, MNI understands.

     Although the central bank generally welcomes a lower dollar as an economic

shock absorber, it sees no need for action to weaken the currency.

     The RBA continues to push back against the idea of negative interest rates.

It has studied their impact elsewhere in the world and believes they would be

unhelpful in current circumstances, impinging on commercial banks' ability to

lend.

     Policy makers in Martin Place also view comments by other central banks,

notably the Bank of England and the Reserve Bank of New Zealand, indicating that

they might be entertaining a cut below zero as more talk than substance.

     By keeping open the possibility, these central banks have been able to add

to downward pressure on their exchange rates without enacting policy measures,

but the RBA is unconvinced these banks will follow through with action, MNI

understands.

     --OUTLOOK IMPROVING

     Characterised as one of the most 'hawkish' central banks for its policy

stance in recent weeks, the RBA has added no new measures to moves announced in

March as Australia's economy re-opens from pandemic lockdown.

     While Australia will enter its first recession in 29 years in the June

quarter the economy is seen as avoiding the worst case scenarios modelled

earlier in the year and the RBA sees the public health success in containing

Covid-19 as likely to result in a faster recovery, underpinned by China's return

to growth and sustained iron ore prices.

     The RBA continues to view Chinese threats against Australia as "shots

across the bow" instead of real threats to domestic recovery.

     China has warned Chinese tourists and students against visiting or studying

in Australia, potentially endangering a trade worth around AUD20 billion a year.

But, with international travel still impossible and no date in sight to reopen

borders, the RBA sees these as threats rather than concrete actions with an

economic impact.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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