RBA Keeps Key Interest Rate Unchanged, Extending Pause as Inflation Eases

The Reserve Bank of Australia left its benchmark interest rate at the highest level in the developed world, saying a stronger currency and an earlier decline in wage growth are helping to contain inflation.

Governor Glenn Stevens held the overnight cash rate target at 4.75 percent today, as forecast by all 25 economists surveyed by Bloomberg News. The central bank expects inflation to stay within its target range of 2 percent to 3 percent over the next year, he said in a statement in Sydney.

“Inflation is consistent with the medium-term objective of monetary policy,” Stevens said. “These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices.”

The RBA, which raised rates seven times from October 2009 to November last year, is favoring growth over containing prices as the country recovers from flooding and cyclones in the northeast. Australia’s economic growth probably accelerated to 0.6 percent last quarter, according to the median estimate in a Bloomberg News survey of 25 economists before a report tomorrow.

The Australian dollar, the world’s fifth-most traded currency, touched a record $1.0256 on Dec. 31 and is about 13 percent stronger than a year ago. The currency weakened after the announcement, trading at $1.0170 as of 2:46 p.m. in Sydney from $1.0185 before the release.

Photographer: Ian Waldie/Bloomberg

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

Glenn Stevens, governor of the Reserve Bank of Australia.

Photographer: Ian Waldie/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia.

Flood Damage

Treasurer Wayne Swan said Feb. 8 that damage from floods and cyclones may cause first-quarter gross domestic product to contract. Economists’ forecasts ahead of tomorrow’s GDP report on the fourth quarter of 2010 range from a 0.3 percent expansion to a 1 percent increase.

“Production losses due to weather are temporarily raising prices for some agricultural produce, but these should fall back later in the year,” Stevens said. He also said reports of skill shortages “remain confined, at this point, to the resources and related sectors.”

Most leading indicators suggest “further growth in employment, though most likely at a slower pace,” Stevens said. “After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.”

Wages Growth

Data in recent days have shown Australian wages grew at the fastest annual pace in almost two years and business investment reached a record as Chinese and Indian demand for commodities capped a year of unprecedented job growth.

“Consumer austerity and the drag from January’s floods have kept the RBA sidelined since November, but the looming wall of income and investment suggests to us that consumer austerity won’t last,” said Stephen Walters, chief economist for Australia at JPMorgan Chase & Co. in Sydney. “We suspect RBA officials will want to stay in front of the boom and, therefore, will hike before midyear, most likely in May.”

Stevens is relying on lower household spending and higher savings to slow price gains and give him scope to delay rate increases. Investors bet there is a 52 percent chance he will raise borrowing costs in August, bank bill futures indicate.

Australian consumer prices advanced 0.4 percent in the fourth quarter from three months earlier, the slowest pace in almost two years, as a stronger currency lowered costs for household appliances, clothing and cars from abroad.

Currency’s Ascent

The currency’s surge has been propelled by demand for iron ore and coal from Australia’s biggest trading partner, China, which has raised rates three times since mid-October. A Feb. 15 report showed China’s inflation exceeded the government’s 2011 target for a fourth month.

Stevens has kept Australia’s overnight cash rate target unchanged in the three meetings since a quarter percentage-point increase in November. In testimony to a parliamentary panel last month, he signaled the RBA was comfortable with borrowing costs.

“We’re ahead of the game, which is where you want to be, and that’s the thing that affords you periods of sitting, waiting and watching,” the governor told lawmakers in Canberra on Feb. 11. “Sometimes, they can be reasonably lengthy periods.”

Driven up by mining jobs, wages grew 3.9 percent in the three months through December from a year earlier, the fastest pace since the first quarter of 2009, a Feb. 23 government report showed. The gap between the RBA’s weighted median measure of inflation and the annual wage price index is the widest in six years.

Resources Boom

BG Group Plc, based in Reading, U.K., said Oct. 31 it will begin work on a $15 billion liquefied natural gas venture in Queensland, generating 5,000 jobs. BG, Chevron Corp., Royal Dutch Shell Plc and ConocoPhillips are among companies investing about A$200 billion ($203.7 billion) in proposed LNG projects in Australia.

Australia is getting caught up in a bubble in international commodity prices and property markets in Asia that could hit much harder than the global financial crisis, Warwick McKibbin, a member of the RBA’s board, told the Australian newspaper in an article published yesterday.

“This is shaping to be much bigger than 2004 to 2007,” the newspaper cited McKibbin, a professor at Australian National University, as saying. He warned the bursting of the bubble would reverse the surge in Australia’s terms of trade, push down the currency and leave the RBA struggling to fight rising global inflation pressures.

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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