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RBA says it may be powerless to stop Aussie d -

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PETER LLOYD: The Reserve Bank Governor Glenn Stevens has spoken about the debt ceiling crisis just averted in the United States.

Mr Stevens revealed that policymakers here had made contingency plans in case of a US default. But it was a hedging moment, as they really had no idea how bad the fallout could be.

One negative outcome of the US political standoff for Australia has been a fall in the greenback and consequent rise in the Australian dollar.

But Mr Stevens says he's not sure the RBA can do much more to lower the dollar from its lofty levels.

Business reporter Michael Janda was at the speech and has this report.

MICHAEL JANDA: Every time the Reserve Bank Governor makes a public appearance, bankers, borrowers and the media try and understand the world according to Glenn.

Generally it's like trying to divine water, and it looked like it was going to be the same today at a British Chamber of Commerce lunch in Sydney, when Glenn Stevens was asked whether the bank might take action if the Australian dollar kept rising.

GLENN STEVENS: Tempted to say if it warrants a response we'll do it and then tell you why but, try to be more constructive.

MICHAEL JANDA: He kept his word about offering useful guidance.

GLENN STEVENS: I personally would continue to think that a lower currency than this would be helpful in rebalancing the growth sources of the economy. I'd prefer it to be lower than this rather than higher. Whether it's in my gift to make that happen is a separate question.

MICHAEL JANDA: It seems Mr Stevens' best hope is to convince currency traders to realise that the Australian dollar is overvalued compared with the weak conditions in the local economy at the moment, and the record low official interest rates.

GLENN STEVENS: I don't think you could really credibly say that the level of costs and productivity in Australia just on that metric and that's not the only metric, but on that metric, I don't think that those things would point you to present or high levels being really sustainable.

MICHAEL JANDA: But while Aussie businesses may be feeling the pressure from a rising dollar, Mr Stevens says the whole world has dodged a bullet, with US politicians averting or at least delaying a debt ceiling disaster.

GLENN STEVENS: I think had the debt ceiling started to impinge in reality, we would have seen a very big fiscal contraction in the United States because 4 or 5 per cent of GDP budget deficit would have to have closed straight away. That would be quite a contractionary impact were that to have occurred. It hasn't occurred and at least for some months now we don't face that particular spectre.

MICHAEL JANDA: But he also says nobody knows just how catastrophic the result of a US default would be.

GLENN STEVENS: The truth is most of us will have worked out a few contingencies, but the truth is we really don't have much idea how that would have gone, it isn't difficult to contemplate why isn't it, could have gone very, very badly, but we really shouldn't be in a position of ever finding out.

MICHAEL JANDA: While most of the questions focused on the here and now, former RBA board member Jillian Broadbent asked about whether low interest rates now mean central banks might confront rampant inflation later.

It's a long-term threat that Glenn Stevens didn’t rule out.

GLEN STEVENS: In the near term, inflation is likely to remain low. Whether it remains low on a 10 to 20 year horizon, I think a lot of that really is going to hinge on character, the determination and the independence of the central banks.

At least on paper that looks fine but I think there will be tests that come the way of central banks at some point on the inflation side, not in the very near term but sooner or later that will occur and really whether the world returns to high inflation or not ultimately is going to hinge very much on how they respond.

MICHAEL JANDA: But on that timeframe, it won't be Glenn Stevens' problem.

PETER LLOYD: That's our Business reporter Michael Janda.