The high Australian dollar has been blamed for high unemployment, low credit demand from businesses and dragging export-led growth. Photo: Bloomberg
The stubbornly high Australian dollar is weighing on the economy and the central bank should consider cutting the interest rate this year, some investors are saying ahead of the Reserve Bank of Australia's monthly board meeting.
The fund managers' case for slashing the interest rate comes as the high Australian dollar has been blamed for high unemployment, low credit demand from businesses and dragging export-led growth.
On Monday morning, the Australian dollar was buying US93.25¢, remaining firmly stuck above US92.00¢, where it has been trading since March.
Reserve Bank governor Glenn Stevens. Photo: Glenn Hunt
While no economist expects the RBA to change tack on rates at Tuesday's meeting, investors point out that falling commodity prices, a declining gap between local and overseas bond interest rates and the stronger US dollar have failed to lower the value of the local currency.
Australian Ethical Investments fund manager Andy Gracey said it made "perfect sense" to lower interest rates this year, ahead of the forecast change in 2015.
"With unemployment heading up, inflation within the Reserve Bank's target band, and the currency stubbornly high, it makes perfect sense to lower interest rates in 2014," Mr Gracey said.
"The combination of contracting mining investment, a strong currency, an already indebted consumer, tighter fiscal policy and cautious companies raises the risk that the central bank may have to ease policy further," Credit Suisse equity strategist Hasan Tevfik said.
But other experts were on the more cautious side and said interest rate cuts should be saved for any shocking offshore events.
"It is not necessary at this stage and should only occur if there was some unforeseen shock from offshore. It is more likely the cash rate will begin to rise slowly in the first half of next year, but only after the Fed begins its policy normalisation process," CIMB equity strategist Shane Lee said.
Schroders head of Australian equities Martin Conlon said lower interest rate could result in a string of undesirable side effects.
"There is ample evidence that lower interest rates are fuelling nothing other than increasing asset prices, suppression of yields and misallocation of capital," Mr Conlon said.
"Although the high Australian dollar undoubtedly causes the RBA some consternation, exacerbating an already significant global problem by following the herd does not seem a defensible solution."
Agreed, more upside when interest rates are cut again. Don't think we will see high interest rates for a very long time and by then most people would chipped away at their mortgage enough to not cause any issues.
