MNI INTERVIEW: Aussie Outperformance May Sap AUD-RBA's Harper

Australia's recovery is sufficiently strong to "ride through" the end of government jobs subsidies at the end of the month, Reserve Bank of Australia Board member Ian Harper told MNI, adding that if the country outgrows competitors in the post-pandemic world then any dollar strength would self-correct regardless of the monetary policy response.

"It ain't over yet, although we've made a terrific dash out of the blocks," Harper, who is dean of the Melbourne Business School and co-dean of the University of Melbourne's Faculty of Business and Economics, said in an interview.

Full employment is unlikely to be achieved over the next 12 months, he noted.

"The growth rate will settle back to a lower level than recorded in Q4 2020 and this lower level will be insufficient to absorb excess capacity over the next year, leading to the prospect of ongoing unemployment higher than the [non-accelerating inflation rate of unemployment] and muted pressure on wages growth," he said, speaking in a private capacity and not in the name of the RBA.

Asked whether a sustained Australian recovery could drive the local dollar higher if other countries' post-Covid growth surges collapse "souffle"-style, he said growth would tend to feed Australia's demand for imports, eroding its trade surplus and correcting any currency strength.

"You know what that would mean for our exchange rate, other things being equal," Harper said.

COMMODITY STRENGTH

The RBA has previously said that it believes its bond-buying programmes have kept the dollar 5% lower than it would otherwise have been. Harper argues that dollar strength is being driven by commodity prices and is "not something the RBA can or should do anything about."

"Moreover, the strength of commodity prices feeds directly into Australian incomes and also raises Commonwealth revenue, helping to reduce the size of the budget deficit," he said.

Any fall in the trade surplus, however, would go strongly against current trends The seasonally-adjusted balance on goods and services increased AUD3 billion to a record AUD10.1 billion in January, driven by iron ore exports which continue to be a factor in the ongoing rise of the dollar.

Harper was unconcerned about the rapid rise in housing prices, saying stronger asset prices "strengthen balance sheets and shore up the financial strength of households and firms."

"Other things equal, this encourages households to consume and firms to invest, both of which stimulate the pace of economic recovery."