December 12, 2014 / 4:37 AM / 4 years ago

Australia central bank talks the talk, less keen to walk the walk

SYDNEY (Reuters) - Australia’s central bank wants a much weaker local currency, but is unwilling to back it up with interest rate cuts or to risk talking down an economy struggling to regain confidence as a mining boom wanes.

Reserve Bank of Australia Governor Glenn Stevens gives a speech entitled "Economic Policy after the Booms" at the Australian business Economists Luncheon in central Sydney July 30, 2013. REUTERS/Daniel Munoz

Yet conditions appear conducive for the head of the Reserve Bank of Australia (RBA) to get his wish: An exchange rate below 80 U.S. cents a year from now.

The currency has already fallen a long way from the heady heights of $1.10 in 2011. It came within a whisker of 82 cents this week, down more than 7 percent so far this year.

In an interview with the Australian Financial Review published on Friday, RBA Governor Glenn Stevens suggested he now saw fair value for the Aussie at 75 U.S. cents.

However, he cushioned the potential impact of his words by sounding reluctant to ease any time soon. That was a blow to investors who have priced in a one-in-three chance of a quarter-point easing as early as February, when the RBA holds its next policy review. CSSY

Market speculation about a rate cut turned red-hot last week following surprisingly weak third-quarter growth numbers.

“The problem for central banks generally is that you can’t pull the currency lower without backing it up with action. So the question going into next year is: Will he follow up with action?” asked Ben Jarman, economist at JPMorgan.

Jarman suspects the RBA will baulk at actually cutting rates, preferring instead to assert the risk of easing in its policy statement without needing to follow through.

Stevens’s track record on the Aussie suggests his wish might come true. Last December, he called for the Aussie to be at 85 cents by now while markets were forecasting 88 cents. The Aussie has ranged between 82 and 85 cents this month.

Stevens argues the Aussie is still too high, given steep declines in commodity export prices - particularly for iron ore.

“An RBA on hold next year, ongoing USD strength and renewed weakness in the prices of Australia’s key commodities suggests the risks are to the downside for the AUD/USD next year,” said Besa Deda, Chief Economist at St George Bank.

St George now no longer expects the RBA to raise rates next year and has pushed down its forecast for the Aussie to 75 U.S. cents by the end of 2015, from 82 cents.

Stevens will hope that call proves prescient.

Editing by Eric Meijer

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