Cut interest rates and push dollar down or suffer, says Garnaut

The depreciation in the dollar needs to be pushed along if Australia is to boost its competitiveness, avoid recession and make investment in industry more attractive, economist Ross Garnaut has said.

Professor Garnaut, a former economics adviser under the government of Bob Hawke, says that the real exchange rate is up 69 per cent – which the Reserve Bank of Australia gives as “the product of the nominal exchange rate and relative price levels” – since the end of 2002 compared to the rest of the world.

Garnaut said that interest rates needed to be cut further to devalue the dollar, and that, without action, trade-exposed industries would find it difficult to get ready for when Chinese demand for resources died down. Other outcomes could include a deep recession.

'We need big contributions from investment and exports in services, specialised manufactures and agriculture right now, but we won't get them until the real exchange rate has fallen by a large amount, and remained low for a considerable period,'' he told Fairfax Media.

The economist noted that the exchange rate needed to drop 20 to 40 per cent to make investment in export- and import-competing industries attractive, and these would need to take over as a driver of Australian economic growth once mining slowed.

The Australian dollar has been frequently cited as an impediment to Australian manufacturers. It peaked at slightly above $US 1.10 in mid-2011, and, at the time of writing, is valued at $US 0.96.

Some are predicting that the Australian dollar will continue to decline in value.

"With commodity prices now in a downtrend and the outlook for the Australian economy deteriorating relative to the US economy, it's likely that the Australian dollar is headed much lower," Shane Oliver, an economist at AMP Capital, told News Limited.

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