Interest rate cuts_ talk is cheap, glenn stevens may soon have to act _ greg jericho _ business _ the guardian

In his statement announcing the decision to keep interest rates steady, the governor of the Reserve Bank of Australia, Glenn Stevens, took the position that when it comes to currency battles it is better to jaw-jaw than war-war.

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Right now it is a bit tough to gauge the “correct” value of a country’s currency. The major trading powers in the world – the US, Europe, Japan and China – are all indulging in some form of aggressive monetary policy which affects the value of their currencies. Whether it be quantitative easing, negative interest rates, or the depreciation of the yuan, countries are competing against each other in a currency war to try to keep the value of theirs down in order to assist with exports.

Thus far the RBA has chosen not to follow such a path – partly because unlike the US and Europe our economy didn’t go into the toilet in the great recession, and also because the falling prices of iron ore, coal and oil were doing the job for it.

The value of our dollar is linked to the prices of our major exports and thus a massive drop in their prices since 2012 has seen similar large falls in the Aussie.

So did Stevens’ words have any impact? Well the dollar did fall about half a per cent on Wednesday, though as ever in the international currency market many factors were in play – including the Japan-US currency battles. But then – because with currency markets nothing ever goes to plan – on Thursday morning it made a small rebound.

But in the past few months there has been a slight improvement in the value of our major export commodities and the dollar has risen from a low of US$0.687 in January to US$0.766 last Thursday:

Now we do need to keep a bit of context – after all the value remains well down on where it was throughout most of 2015. But after a nine-month run of being below US$0.75, the dollar looked set on a path to US$0.80:

The clearest way the RBA could prevent this is by cutting interest rates. A lower interest rate means a lower return on money held in Australian banks in Australian dollars, thus international investors move money into another currency where they can get better returns.

This reduces the demand for our dollar, and also reduces its price (in terms of other currencies such as the US dollar). But cutting the exchange rate has implications for our economy – implications that can outweigh the concerns of a high dollar.

For example, the housing market has shown distinct signs of cooling off in Sydney and Melbourne.

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The RBA’s statement on Tuesday noted: “The pace of growth in dwelling prices has moderated in Melbourne and Sydney and has remained mostly subdued in other cities.”

The bank would be happy with this – growth in housing prices is good, but not if it is so strong that it may lead to a bubble. And that’s the problem with cutting rates to help lower the value of our dollar – it could start up the housing boom again.

And so instead of cutting the RBA used words.

Generally the statement issued each month by the governor of the RBA announcing the latest interest rate decision changes very little – and people like me perhaps spend far too much time pondering the differences in words.

For example on the issue of inflation, in March the governor said: “Inflation is quite low. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, inflation is likely to remain low over the next year or two.”

This month he said: “Inflation is quite low. Recent information has confirmed that growth in labour costs remains quite subdued. Given this, and with inflation also restrained elsewhere in the world, inflation in Australia is likely to remain low over the next year or two.”

A few changes, but there’s not a lot of difference in meaning between “continuing to be quite subdued” and “remains quite subdued”.

But this month there was a big difference in the language relating to the exchange rate.

Last month there was merely a by-the-by aside that “the exchange rate has been adjusting to the evolving economic outlook”.

This month a new paragraph was inserted noting: “The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

“Complicate the adjustment” is a pretty unsubtle way of Stevens alerting the world’s currency traders that he won’t stand by while the dollar continues to rise – especially if due to “developments elsewhere in the world” (ie other central banks working to lower the value of their own currency).

Australia’s rebalancing economy currently needs a lower dollar – especially in light of the trade figures also out yesterday which showed a near record deficit:

That deficit is in current dollars and thus it is not our lowest in terms of GDP, but it is still nothing to be too happy about – especially as it occurred due to exports falling by more than imports have:

Surprisingly, the exports falls – at least in seasonally adjusted terms – were not from the mining sector, but the rural one.

In trend terms however both sectors fell. The one bright spot has been the services sector – ie mostly tourism and education – the sectors most affected by a rising dollar:

So did Stevens’ words have any impact? Well, the dollar did fall about half a per cent on Wednesday, though as ever with the international currency market many factors were in play – including the Japan-US currency battles. But the dollar is now 1.3% below where it was on Thursday.

The market has also priced in a greater chance of a rate cut by the end of the year than was previously expected:

That doesn’t mean there will be a rate cut – the market in January thought the chances of a rate cut this month were about 50:50. But it reflects a view that the RBA is now seen as more likely to cut, and that in itself may help dampen demand for our dollar and keep it from rising to US$0.80.

If it doesn’t, Stevens will have to move from talking about cutting rates to actually doing it. In the currency wars, all talk no action rarely wins the day.