Australian Banking Chief: We found that we could not have full control over monetary policy until the exchange rate was market-determined.
By staff reporter Yu Ning
More exchange rate flexibility will be in China’s best interest, said the head of Australia’s central bank to reporters from four Chinese media.
One week after the interest hike by Australia’s central bank, Glenn Stevens, governor of the Reserve Bank of Australia, spoke to Chinese media August 15 on a range of issues including Beijing’s currency exchange rate reform, foreign direct investment, inflation and asset price, central banking independence, and potential financial crises.
In response to China’s state-controlled exchange rate, Stevens said, “In our experience, we found that we could not have full control over monetary policy until the exchange rate was market-determined.”
He said Australia was not able to control precisely how much money was in their banking system until the reserve bank adopted a floating exchange rate (exchange rate determined by the free market.)
Australia had tried virtually every exchange rate regime to liberalize their economy until they finally settled on the floating regime and allowed the market to set the exchange rate, said Stevens.
He said floating currency has been beneficial because it helps the economy adjust to international events in a smoother fashion than we would otherwise have been able to manage.
Stevens also said in regard to China’s gradually appreciating currency, 'I think that it is a logical development given China's economic fundamentals, and I personally think that in the long-run China will be a large economy and it will have a strong currency.'
On the topic of China’s soon-to-be-launched state forex investment company, Stevens predicted that other countries, who may be on the receiving end of the investments, will want to know the company’s risk management approach, regulations, and investment preference.
The state foreign exchange investment company will be set up to buy shares in U.S. private equity group Blackstone, after China agreed in June to take a US＄ 3 billion stake in the firm.
“I think it would be in China's interest to give those answers, (and) there to be very clear mandates or instructions given to those fund managers because it's the Chinese people's money,” said Stevens.
Further, he said it was probably too early to tell how effective China’s central bank’s measures of tightening monetary policy has been in keeping Beijing’s red hot economy from overheating.
But Stevens said it was important for the central bank to be independent in order to hedge inflation.
Within a framework determined by the government, central banks should have some freedom to do their jobs, and these systems work very well in the United States and in the UK, he said.
In response to Australia’s boom in the stock and property market, Australia’s central bank had announced August 8 an increase of its benchmark interest rate by 25 base points to 6.5 percent, the highest in the past decade. As the nation is going to hold national election later this year, the move surprised the market.
“We had some statistics on inflation, which were a little bit higher than expected, in addition the economy is growing more strongly than expected, and therefore there is some heightened risk of inflation exceeding our target over the median term,” he explained.
Stevens said their monetary policy responds to consumer price inflation rather than asset price changes in the stock and property market.
The next financial crisis might be quite different from the 1997-style event that stroke Asian countries hard. Stevens said East Asian countries are better equipped today to tackle another 1997-style event with much higher foreign reserves. But if the next crisis comes in a different nature, more resilience of the financial system is needed to cope with the new challenge.
The latest credit crunch in the U.S. is an example that “you can get events in the rich countries that trigger instability globally that will affect all of us,” said Stevens. “So we’ve got to think about our resilience in those kind of episodes as well.”
It’s possibly related to that, but I think we are at present seeing an event which originated in the United States because of basically risk taking, which turned out to be, these loans turned out to be riskier than people realized. That is not a global crisis, but it’s certainly an event which is having ramifications around the world. That is not something that originated in emerging markets. It originated in the most developed, sophisticated country in the world. The point is that the shocks to which we all have to respond can originate in the developed world, not just in the emerging world. We don’t want all our guns trained on the last war, so to speak. We don’t want to be only thinking that the thing that can go wrong is some event in Asia that triggers capital flow. That’s possible, but you can get events in the rich countries that trigger instability globally that will affect all of us. So we’ve got to think about our resilience in those kind of episodes as well. And I think for countries in Asia, strong domestic financial systems, exchange rate flexibility, well-developed macro-economic policy structures, all these things are helpful in these sorts of circumstances.
On the subject of the United States sub-prime loan crisis, Stevens said they were still trying to “ascertain what the exposures to those assets are, and who has those exposures, and to adjust accordingly.”
“There's a little bit of additional uncertainty at the moment, but these things I'm sure will be sorted out as time goes by.'
Translated by intern researcher Wu Zheng
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