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Monday, 4 May 1987
Page: 2213

Senator Dame MARGARET GUILFOYLE —I refer the Minister representing the Treasurer to the recent increase in prime interest rates by major banks in the United States of America as well as public statements by that country's Federal Reserve Bank that the US dollar will be defended by tighter monetary policy. Does the Minister agree that events in the United States could have very damaging consequences for the Australian dollar if foreign funds are switched from Australia to the United States? Does the Minister envisage the need for an increase in Australia's already high interest rates to maintain the differential which has attracted the large amounts of foreign currency needed to cover the current account deficit?

Senator WALSH —I hope I got enough of the question down to be able to give an adequate answer. Firstly, I will not speculate about how much interest rates might move in any particular direction. Certainly some of the presumptions in Senator Dame Margaret Guilfoyle's question are reasonable. But in respect of the United States, not only has it been clear to many people for at least a couple of years but also it has been authoritatively written that the United States dollar is overvalued. If I remember correctly, predictions were made by Lester Thurow of an overreaction and a fall of 50 per cent in the value of the United States dollar which, measured against the Japanese yen, is in fact about what has happened. Thurow did not make it clear whether he was referring to the yen or the trade weighted index but a fall of something like that against the Japanese yen has in fact happened.

Whether the declining market price of the United States dollar, which probably reflects a more realistic estimate of its value than the price at which it had previously been exchanged, will impact adversely on Australia is, I think, a matter for rather complex judgment. Superficially, it might be expected that the movements would be in the way Senator Dame Margaret Guilfoyle suggested. The United States is seen to be a much less attractive area in which to lodge liquid funds and that is the reason why the US interest rate has been pushed up-to make it somewhat more attractive to counteract the disincentive of the recent very substantial decline in the exchange rate of the US dollar. Whether one more than offsets the other is very much a matter for judgment.