He indicated the currency should now be closer to about US75¢; declared the recent drop in the global oil price to about $US60 a barrel as "bullish" news for the global economy; and said this year's strategy of keeping rates steady at 2.5 per cent delivered a message of stability and predictability that was the best way to buttress household and business sentiment. In some of his toughest comments on record, Mr Stevens hit out at Canberra's failure to "get real" about the budget, warning Australia's AAA rating could be threatened if longer-term tax and spending issues weren't fixed. Without action, including from Senate crossbenchers, he suggested Australia could within five years find itself forced by international bond markets to adopt more hard-line austerity measures, something that has led to double- and triple-dip recessions in Europe. However, he endorsed Treasurer Joe Hockey's decision not to make additional spending cuts in next week's mid-year budget update to offset softer tax revenues: "And I don't think they will." Mr Stevens chipped commentators who he said had overstated recent weakness in the economy caused by lower income growth from wages and exports of iron ore and coal. "I think bandying around the term 'income recession' tends to . . . misconstrue to people what this event is about," he said.

"The economy is not in recession, it's not contracting, we're not having hundreds of thousands of jobs lost over a year. So I think we need to be careful with the language, just to convey to ­people what's going on." A In a sign the central bank is in no rush to cut the cash rate from its record-low 2.5 per cent level, Mr Stevens ­downplayed recent market and public excitement, saying he was yet to decide if the growing economic momentum earlier in the year had given way to a more "wobbly" business outlook. "Is that a turn back down? Or is it just a short-term pertubation that will pass? The answer to that is we can't really know, I think. But that's the thing we have to watch," he said. After beginning the rate-cutting cycle three years ago – taking the cash rate to the "lowest level it has been in my lifetime on a sustained basis" – Mr Stevens said the bank has this year focused on maintaining stability.

"I have been asking myself what can we do that will be most conducive to supporting confidence, predictability, the sense that people can make some plans for their business, their own life, whatever it might be," he said. "And the view I came to pretty early on was: what we should be doing is giving a message of stability and predictability insofar as we can," he said. While it was impossible to be "perfectly predictable because we don't know ourselves what is going to happen in the future", that had helped spur animal spirits. "Now, if at some point we can be more helpful for confidence by doing something different, then obviously that will be on the table, and we will take a fresh look at all these things in the new year," he added. Mr Stevens acknowledged that the falling terms of trade – a key measure of export income that will see billions wiped from next week's budget update – had been greater than expected, and said it was a key reason the currency should fall. He said that if he had to pick a level for the currency, "probably US75¢ is better than US85¢".

Now that foreign exchange markets were "starting to behave more consistently" given falling prices for key Australian exports such as iron ore, he predicted further declines in the dollar were likely. Consumers to feel the pinch Mr Stevens's comments echo what he said 12 months ago, in his last interview with the Financial Review , when he indicated the currency needed to drop to US85¢. It has spent most of the past year above that level, but in recent months has declined sharply to below US83¢. He indicated the dollar was likely to fall against other currencies as well. "I think the adjustment we have been seeing is taking us closer to where most fundamental metrics have you be, but I doubt that adjustment is yet complete," he said.

Mr Stevens said the ideal level for the dollar was something of a moving target, but that it had come from an unsustainable level of well above parity. "Some further adjustment is going to have us much more like normal historical levels, at least against the US dollar and maybe some others." Most consumers would feel that adjustment through the fact that it was becoming more expensive to have an overseas holiday, and that petrol would become cheaper, he said. The falling terms of trade, together with the downwards shift in national income recorded in last month's national accounts, would mean the federal budget would be likely to have less revenue, and some companies would provide lower returns to shareholders – which would mean an indirect hit to superannuation funds. "[But] for most of us the most direct impact is our purchasing power over foreign goodies is not as high as it was," Mr Stevens said. "With a lower exchange rate, the price of foreign goods and services go up, and that will affect their behaviour, including the tendency for them to substitute between foreign and domestic [goods and services].

"That's the place where nine out of 10 people feel it most directly. What's really happening is the purchasing power of Australians over foreign goods and services that result from what we export has gone down. "It's no great surprise that it's going down. We could debate whether we can all pick the speed and so on, but I think we've been talking about the fact the terms of trade weren't going to stay at those one-in-a-hundred-year highs; they would come back to some extent." Read the full story at The Australian Financial Review