RBA to Extend Australia Rate Pause on Global Concern
Reserve Bank of Australia Governor Glenn Stevens
Ian Waldie/Bloomberg
Reserve Bank of Australia Governor Glenn Stevens.
Reserve Bank of Australia Governor Glenn Stevens. Photographer: Ian Waldie/Bloomberg
Sept. 6 (Bloomberg) -- Rhett Kessler, who helps manage about $1 billion at Pengana Capital Ltd. in Sydney, talks about his investment strategy for Australian stocks. Kessler also discusses the outlook for Reserve Bank of Australia monetary policy and the U.S. economy. He speaks with Susan Li on Bloomberg Television. (Source: Bloomberg)
Sept. 6 (Bloomberg) -- Julia Lee, an analyst at Bell Direct, an Australian online brokerage, talks about the outlook for Australian stocks and the country's economy. Asian stocks rose, driving the MSCI Asia Pacific Index to the highest level in four weeks, as better-than-estimated jobs data in the U.S. eased concern global economic growth is faltering. Australia’s S&P/ASX 200 Index rose 0.8 percent to 4,575.50 at the 4:10 p.m. close of trading in Sydney. Lee talks with Mark Barton on Bloomberg Television's "Global Connection." (Source: Bloomberg)
Australia’s central bank may keep its benchmark interest rate unchanged for a fourth month to support the nation’s economy as concerns deepen that recoveries may be faltering in the U.S., Japan and Europe.
Reserve Bank of Australia Governor Glenn Stevens and his board will leave the overnight cash rate target at 4.5 percent in Adelaide tomorrow, according to all 25 economists surveyed by Bloomberg News. The decision will be published at 2:30 p.m. Sydney time.
Australia’s expansion is unlikely to stoke inflation for the next two years as weaker government spending offsets a boost from the nation’s mining boom, the RBA said last month. Even so, Stevens may resume the most aggressive round of rate increases by a Group of 20 member next quarter or in early 2011 after a report last week showed the economy grew the most in three years.
“The Reserve Bank will no doubt indicate that our economy is doing fine, but it will also acknowledge the uncertainties abroad,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “While there is a risk rates could rise late in the year, for now at least the RBA has no work to do.”
Global shares tumbled in August as investors expressed doubts about the world recovery. Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., said growth around the world will be below average during the next three to five years as developed economies struggle with mounting deficits.
Slump in Stocks
The S&P 500 index fell 4.7 percent in August and the MSCI World Index slumped 3.9 percent, its biggest monthly drop since May. Australia’s benchmark S&P/ASX 200 Index shed 2 percent.
Australia’s dollar was little changed at 91.55 U.S. cents at 11:08 a.m. in Sydney today from 91.66 cents on Sept. 3, when it reached 91.76 cents, the highest since Aug. 9.
Stevens left borrowing costs unchanged five weeks ago, citing signs that the U.S. economy’s expansion may be “somewhat lackluster” in the second half of this year, as well as uncertainty about Europe in 2011.
Policy makers in Asia and Europe left rates unchanged last week to support growth as the global recovery slows, including the European Central Bank and Malaysia, which kept its overnight policy rate steady after three straight increases.
Bank of Japan Governor Masaaki Shirakawa and his board expanded a bank-loan program by 10 trillion yen ($119 billion) after an emergency meeting on Aug. 30. The government pledged to channel 920 billion yen to buttress domestic demand.
Australia Inflation
Australian policy makers also have scope to keep borrowing costs unchanged after a report on July 28 showed consumer prices rose the least in three years last quarter. Core prices, as measured by the central bank’s trimmed mean gauge, rose 2.7 percent in the second quarter from a year earlier. Stevens aims to keep price gains between 2 percent and 3 percent.
A monthly gauge published by TD Securities Ltd. suggests underlying inflation in the September quarter “remains comfortably within target,” said Annette Beacher, a senior economist at the bank
The annual trimmed mean inflation rate, a measure that excludes the most volatile price changes, was 2.3 percent in August, TD’s gauge showed today. Consumer prices increased 0.2 percent from July, when they advanced 0.1 percent.
‘Goldilocks’ Situation
“As this ‘goldilocks’ situation appears likely to remain for the Australian economy for longer, we are now of the view that the RBA can sit tight at 4.5 percent for the remainder of 2010,” Singapore-based Beacher said.
Traders calculate no chance of a quarter-percentage-point increase in the benchmark rate to 4.75 percent tomorrow, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:07 a.m. today. There is an 8 percent chance of an increase in November.
Stevens raised the benchmark rate in six quarter-point steps to 4.5 percent in May from a half-century low of 3 percent in October, boosting borrowing costs paid by households and businesses to levels he has described as “average.”
The rate moves have also helped stoke a 7.6 percent gain in the nation’s currency against the U.S. dollar in the past 12 months, the second-best performer among the 16 most actively traded currencies
Still, there are signs that inflation pressures may build sooner than the RBA anticipates. Australia’s economy grew 3.3 percent last quarter from a year earlier, beating the median estimate of analysts for a 2.8 percent gain. The increase was also larger than the 3 percent forecast by the RBA on Aug. 6.
‘More Hawkish’
“We expect inflation to pick up,” said Tim Toohey, chief economist at Goldman Sachs & Partners Australia Pty in Melbourne. “The next interest rate hike is most likely to come in November, but an earlier move in October cannot be ruled out.
“Indeed, the RBA could start to signal a more hawkish bias as soon as” tomorrow, he said.
Policy makers expect Australia’s annual growth rate to accelerate to 4 percent by the end of 2012, boosted by projects such as Chevron Corp.’s A$43 billion ($39 billion) Gorgon natural gas venture in Western Australia.
China’s demand for raw materials such as coal and iron ore also boosted Australia’s terms of trade, a measure of income from exports, to a record last quarter.
Resource Booms
“History tells us that inflation can be a problem during resources booms, and while there are grounds for thinking it will be less of a problem this time than in the past, we need to remain alert to the risks,” central bank Deputy Governor Ric Battellino said last month.
Last week’s gross domestic product report also suggests the economic expansion is spreading from the mining industry to households that account for more than half the economy.
Employers added 25,000 workers in August, the 11th month of gains in the past year, according to the median forecast of 25 analysts surveyed by Bloomberg News ahead of a Sept. 9 report. The nation’s jobless rate was 5.2 percent, almost half the level of the U.S, according to the poll.
A report today showed job advertisements in newspapers and on the Internet rose in August for a fourth month, gaining 2.6 percent, Australia & New Zealand Banking Group Ltd. said.
Australia’s economy remains robust even amid uncertainty caused by last month’s federal election, which left the nation with a hung parliament.
Neither Prime Minister Julia Gillard nor opposition leader Tony Abbott gained an outright majority on Aug. 21, meaning one side must win negotiations with independent lawmakers to form government.
To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net
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