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Former Fed Chairman Warns Australia of High A$

Former Fed Chairman Warns Australia of High A$
May 29, 2015 By Simon Herrmann

At the World Business Forum in Sydney on Thursday, former US Federal Reserve chairman Ben Bernanke warned the country of the high valuation of the Australian dollar. Although the AUD has been following a downward trend over the past year, Mr. Bernanke said it was still too high and may limit economic growth. “If Australia finds it has a strong Australian dollar and it has higher unemployment, then it would have to respond and that would be either be by increasing domestic demand or by weakening its own currency,” he said.

The former Fed chairman also noted that regulators were taking the proper steps to reduce the risks in the rapidly growing Australian property market. Last year, the Australian Prudential Regulation Authority (APRA) issued a new regulation limiting housing lending growth to 10 per cent. Most institutions, including banking giant Westpac, have put policies in place in order to stay within the new growth range. In the case of Westpac, the bank recently sent out a memo stating the discount program on new property investment loans was to end. Data from the bank showed property investment loans had peaked above 10 per cent over the year.

Mr. Bernanke went further to advocate the efficacy of quantitative easing (QE) programs. “I’m pretty confident [QE programs] have been effective, and, at least so far, they haven’t had many of the bad side-effects that people were saying were bound to come,” he said. He noted that the US and the UK put QE programs into place before other advanced economies had, which brought about a quicker recovery. Mr. Bernanke also discussed the potential interest rate increase in the US, which has been troubling investors for several months. He downplayed the potential shock the interest rate change would have on international markets. “…if the Fed does a good job of communicating, then that should minimise the shock once that normalisation begins.”

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Simon Herrmann Author: Simon Herrmann May 29, 2015

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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