RBA Sees Inflation Little Changed as Economists Push Back Rate-Rise Calls

The Reserve Bank of Australia signaled little concern inflation will accelerate in the first half of next year, leading some economists to predict a longer pause until the next increase in borrowing costs.

Governor Glenn Stevens, who left the benchmark interest rate at 4.75 percent yesterday after the most aggressive tightening in the past 15 months among the Group of 20, said inflation in the next few quarters is expected to be “little changed.” That shorter-term outlook wasn’t in the Nov. 2 rate- increase announcement, and some economists viewed it as a guidepost for the RBA’s policy timetable.

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. “We have changed our rate view, now expecting the next rate hike in April 2011, rather than February.”

The nation’s currency reached parity last month with the U.S. dollar and household savings are rising, helping the RBA meet its goal of controlling consumer prices. While the economy has experienced a jobs boom this year as mining companies boost investment to meet demand from China, Stevens said “some leading indicators suggest a more moderate pace of expansion” in employment.

Local Currency

Australia’s currency was little changed after yesterday’s decline, trading at 98.37 U.S. cents as of 1:15 p.m. in Sydney from 98.29 cents in New York yesterday, when it dropped 0.7 percent. The local dollar has risen 9.7 percent this year, the second-best performer among the 16 most-traded currencies.

A government report today showed home-loan approvals climbed in October for a fourth straight month before the RBA resumed raising rates in November.

The number of loans granted to build or buy houses and apartments gained 1.9 percent to a nine-month high of 49,307 from September, the statistics bureau said in Sydney. That compares with a Bloomberg survey for approvals to be unchanged.

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.”

‘Degree of Caution’

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 yesterday said “lending rates in the economy are now a little above average.”

Since the November 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.

Economy Slows

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.

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 report tomorrow.

Jobs Growth

Yesterday Stevens said “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.

“For the RBA, the main game is, of course, how the economy and inflation are tracking in 12 to 18 months,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “The case for pushing the policy rate further into restrictive territory in 2011 remains strong, however, considering our key themes for above trend growth and rising inflation over the medium term.”

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 86 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.

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

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.