RBA Keeps Rate Unchanged, Sees Inflation Little Changed Next Few Quarters

The Reserve Bank of Australia kept its benchmark interest rate unchanged as the country’s growth slows and risks to the global economic recovery persist, saying inflation likely will be contained through mid-2011.

Governor Glenn Stevens and his board left the overnight cash rate target at 4.75 percent today in Sydney, as forecast by all 26 economists surveyed by Bloomberg News. After seven rate increases since October 2009, Stevens said monetary policy is “appropriate for the economic outlook.”

Australia’s economy this year may expand less than the RBA’s forecast of 3.5 percent, Citigroup Inc. economists said, after third-quarter growth was the weakest in almost two years. The slowdown, a higher currency and rising household savings may help Stevens achieve his goal of cooling inflation as investors bet his next rate increase won’t occur before March.

“The statement surprised me, I expected they’d be less dovish,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “They’re implying now that rates are appropriate, whereas we had expected more rate hikes. Europe may be weighing on their minds.”

Australia’s benchmark S&P/ASX 200 Index rose 0.8 percent to 4,726.8 after the decision, the highest closing level in almost a month. The Australian currency was little changed, trading at 99.14 U.S. cents at 4:24 p.m. from 99.08 cents just before the announcement.

Photographer: Luis Enrique Ascui/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia. Close

Glenn Stevens, governor of the Reserve Bank of Australia.

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Photographer: Luis Enrique Ascui/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia.

Dollar’s Rise

The so-called Aussie is 8.6 percent stronger than a year ago against the U.S. dollar.

The currency’s strength “will assist, at the margin, in containing pressure on inflation over the period ahead,” Stevens said in his statement. “Over the next few quarters, inflation is expected to be little changed, though it is likely to increase somewhat over the medium term if the economy grows as expected.”

Stevens also said “there continues to be a degree of caution in spending and borrowing” and a “noticeable increase” in the nation’s savings rate.

The RBA’s quarter-percentage-point increase last month was followed by larger moves in mortgage rates by the nation’s four largest banks. As a result, Stevens today said “lending rates in the economy are now a little above average.”

Weaker Expansion

Since the Nov. 2 rate increase, some reports indicated economic growth is decelerating.

Retail sales declined in October by the most since July 2009, according to data released last week, and a private report showed consumer confidence fell in November to a five-month low. Household spending accounts for about half of the nation’s gross domestic product.

Business profits also dropped in the three months through September, the first quarterly decline in more than a year.

The economy grew 0.2 percent from July through September from the previous quarter, less than economists predictions of a 0.4 percent expansion and the worst performance since a contraction at the end of 2008, a government report showed on Dec. 1.

Stevens, in his statement, said the creditworthiness of some European governments has “again become the main focus of financial markets,” while China and India have “continued to grow strongly.” The U.S. is experiencing “modest growth,” he said.

Mining Boom

The RBA is seeking to contain an expected acceleration in inflation as Australia goes through a resource investment boom that is prompting companies to increase hiring to meet demand from China and India.

Australian employers probably added 20,000 workers in November, the ninth straight month of gains, according to a separate Bloomberg survey ahead of a Dec. 9 report.

Stevens said today “employment growth has been very strong over the past year, though some leading indicators suggest a more moderate pace of expansion in the period ahead.”

Fortescue Metals Group Ltd., Australia’s third-biggest producer of iron ore, last month approved an $8.4 billion expansion in Western Australia’s Pilbara region to almost triple output as demand from steelmakers strengthens.

It joins Rio Tinto Group, Vale SA and BHP Billiton Ltd. in announcing expansions as prices increase. Producers are seeking to meet demand from steel mills in China, where consumption of the alloy is forecast by Rio Tinto to double by 2020 from 2008 levels.

‘Overheating’ Concern

Stevens said in a speech in Melbourne last week that “we obviously have to be wary of overheating,” as the country undergoes “an event that occurs maybe once or twice in a century.”

Australian consumer prices rose 2.8 percent in the third quarter from a year earlier, less than economists forecast and following a 3.1 percent gain the previous three months, a government report showed Oct. 27.

The RBA aims to keep inflation in a range of 2 percent to 3 percent on average.

Traders bet there is an 88 percent chance Stevens will leave borrowing costs unchanged through the first quarter of next year, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

“The Reserve Bank is clearly more relaxed and comfortable, believing that employment growth will slow and inflation will remain under control,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney.

After today’s decision, James said Commonwealth Bank changed its rate view and now expects the next increase in April instead of its previous forecast for February, with the cash rate to end 2011 at 5.5 percent rather than 5.75 percent.

To contact the reporter for this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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