SYDNEY, Feb 15 (Reuters) - The recent decline in the Australian dollar has been helpful "at the margin" to the domestic economy given there is still spare capacity in the labour market and inflation remains below target, a top central banker said on Friday.
Speaking at a foreign exchange conference in Melbourne, Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said the local dollar had dropped as markets swung to price in a greater chance of rate cuts, pushing down bond yields.
"While the exchange rate is still within the relatively narrow range of the past few years, the recent depreciation is helpful at the margin given that there remains spare capacity in the economy and inflation remains below target," said Kent, who heads the central bank's financial markets unit.
Kent said the Aussie currency had declined by about 4 percent on a trade-weighted basis (TWI) over the last couple of months. This largely reflected the effect of a rise in the Japanese yen and the Chinese renminbi, which comprise nearly 40 per cent of the TWI.
Kent noted the RBA had recently revised down its forecasts for both economic growth and inflation, though it still expected a further gradual reduction in spare capacity and lower unemployment.
"That should see wages growth pick up, although only gradually, and inflation is also expected to increase gradually," he added.
He noted also two-year bond yields in Australia had tended to decline by more than in many other major markets.
"Part of that change is somewhat mechanical given that in both Japan and the euro area policy rates are close to their effective lower bounds," Kent said.
