Australia Extends Rate Pause Following Global Growth Concern
Glenn Stevens, governor of the Reserve Bank of Australia
Ian Waldie/Bloomberg
Glenn Stevens, governor of the Reserve Bank of Australia.
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg
Australia’s central bank extended its pause in raising interest rates “for the time being” as concern that the global economic recovery may falter trumped evidence of an accelerating expansion at home.
Governor Glenn Stevens kept the overnight cash rate target at 4.5 percent for a fourth month, matching all 25 economists’ forecasts in a Bloomberg News survey, a Reserve Bank of Australia statement showed in Adelaide.
Diminishing prospects for growth in the U.S., the world’s largest economy, sent global stocks tumbling last month and prompted the Federal Reserve to signal openness to adding monetary stimulus. Today’s decision also avoids stirring homeowners’ ire at a time when Prime Minister Julia Gillard needs to build support for her minority government, made possible today through the support of two independent lawmakers.
“They’ve opened up their options a little more by adding ‘for the time being’” to their assessment of the rate, said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. “I don’t think there is any sense they’re just about to pull the pin, but if you were uncertain about which way they were going to move, this makes it clear that it’s up.”
Local Currency
The Australian dollar traded at 91.27 U.S. cents at 4:18 p.m. in Sydney from 91.69 cents just before the decision was announced. The currency declined after Gillard clinched a deal with independent lawmakers Rob Oakeshott and Tony Windsor, who said they would back her Labor Party with the help of a Greens party lawmaker over Tony Abbott’s opposition.
“The fiscal outlook looks worse under a minority government and management of an economy growing at 10 percent in nominal terms may increasingly rest on the RBA,” said Michael Turner, a fixed-income strategist at RBC Capital Markets Ltd. in Sydney.
“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being,” Stevens said in today’s statement.
Rising spending, along with an intensifying mining boom propelled by Chinese demand for Australian iron ore and coal, has put pressure on Stevens to resume the most aggressive round of rate increases by a Group of 20 member by early 2011.
Pessimism Waning
There are also signs that global investor pessimism may be waning. A measure of world stocks rose to a four-week high and industrial metals have rallied, while European bonds rebounded from three days of losses. The MSCI World Index of shares in 24 developed markets climbed 0.4 percent at 5 p.m. in New York.
Australia’s benchmark S&P/ASX 200 was little changed after gaining for four straight days. The index closed at 4573.20.
Australia’s expansion is unlikely to push underlying inflation above the central bank’s target range of 2 percent to 3 percent before the middle of next year, Stevens said today.
The governor, who left borrowing costs unchanged five weeks ago, today cited signs that the U.S. economy’s expansion during the second half is “looking weaker,” while prospects for Europe are for “slower growth.”
Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., has said growth around the world will be below average during the next three to five years as developed economies struggle with mounting deficits.
Asia, Europe
Policy makers in Asia and Europe left rates unchanged last week to support growth, including the European Central Bank and Malaysia, which held its overnight policy rate 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. They left the facility, along with the 0.1 percent benchmark rate, unchanged at a scheduled meeting today. The government pledged to channel 920 billion yen to buttress domestic demand.
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 governor’s six rate moves added about A$3,600 ($3,300) a year to loan repayments on an average A$300,000 mortgage.
The rate moves have also helped stoke a 6.7 percent gain in the nation’s currency against the U.S. dollar in the past 12 months, the third-best performer among the 16 most actively traded currencies.
Inflation Pressures
Still, there are signs that inflation pressures may build sooner than the RBA anticipates as Australia’s export-driven expansion has shown signs of broadening, with the biggest jump in gross domestic product since 2007 coming in part on stronger domestic demand.
GDP rose 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.
Last week’s GDP report suggests the economic expansion is spreading from the mining industry to households that account for more than half the economy.
“Recent information suggests that the Australian economy has been growing at around trend pace,” Stevens said today. “Indications are that business investment in particular could increase strongly.”
Accelerating Growth
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 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.
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.
“The demand for labor has firmed over the past year in line with improving growth,” Stevens said.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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