RBA Saw ‘More Time’ to Assess Global Risk, Inflation Outlook, Minutes Show
RBA Board Had `More Time' to Assess Inflation, Minutes Show
Sergio Dionisio/Bloomberg
Employees arrive at The Reserve Bank of Australia headquarters in Sydney, Australia.
Employees arrive at The Reserve Bank of Australia headquarters in Sydney, Australia. Photographer: Sergio Dionisio/Bloomberg
July 19 (Bloomberg) -- Katie Dean, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne, talks about the Australian economy and central bank monetary policy. Australia’s central bank had scope to extend an interest-rate pause because risks posed by Europe’s debt crisis and a slower-than-forecast domestic recovery eased inflation concerns, minutes of its July 5 meeting showed. Dean speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
Australia’s central bank had scope to extend an interest-rate pause because risks posed by Europe’s debt crisis and a slower-than-forecast domestic recovery eased inflation concerns, minutes of its July 5 meeting showed.
“The flow of recent information suggested both that there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time,” according to the minutes released today by the Sydney- based Reserve Bank of Australia. “Growth in aggregate demand was not showing signs of a further pick-up yet.”
RBA Governor Glenn Stevens has kept the official cash rate unchanged since November 2010 as the economy recovered from the country’s costliest floods and the labor market lost 5,400 jobs in the April-June period, the weakest quarter since 2001. At 4.75 percent, the rate is the highest among the world’s developed economies.
The RBA saw wages pressures emerging in some mining-related occupations “but these pressures remained fairly localized,” the minutes said. The July 27 release of the second-quarter report on consumer prices would be “important in helping to shape views about inflation, and therefore the future path of interest rates,” the minutes said.
The Australian dollar fell to $1.0636 at 12:18 p.m. in Sydney from $1.0641 before the minutes were released.
Bond Rally
Government bonds extended this month’s rally after the RBA release. The yield on the two-year note fell to 4.29 percent as of 12:18 p.m. in Sydney, from 4.31 percent just before the minutes were released, data compiled by Bloomberg shows. The rate has dropped 45 basis points, or 0.45 percentage point, since June 30.
The minutes reflected a central bank that saw sovereign debt woes in Europe, particularly in Greece, as “a significant downside risk for the global economy” and a U.S. economy where “growth had moderated.”
The minutes said RBA board members viewed the labor market as “not tightening significantly further at present.”
Australia’s recovery from flooding earlier this year in Queensland, the nation’s biggest coal exporting state, was proceeding more slowly than the central bank had predicted, according to the minutes. The multi-speed nature of the economy was “clearly evident” in recent economic reports, it said.
‘Significantly Longer’
“The recovery of coal exports from the Queensland floods was taking significantly longer than earlier expected and the return to full capacity could be delayed until early 2012,” the minutes said. “The delay in the recovery of coal production plus continuing signs of cautiousness on the part of households meant that growth in 2011 was likely to be lower than had been expected a couple of months earlier.”
The resources industry, and the medium-term outlook for the Australian economy in general, are both “strong,” the minutes said. “However, household cautiousness and the high exchange rate were having a dampening effect on a number of other sectors.”
Since the RBA’s last meeting, private reports have shown weaker business and consumer confidence.
Consumer sentiment this month plunged by the most since Lehman Brothers Holdings Inc. collapsed in 2008, a survey from Westpac Banking Corp. and Melbourne Institute showed. Business confidence dropped in June to a six-month low, according to a National Australia Bank Ltd. survey of more than 400 companies from June 24 to June 30.
Consumer Caution
“The household sector continued to be cautious in its spending and borrowing behavior,” today’s minutes said. While the outlook for mining-led investment “continued to be very strong,” financing for other industries “remained soft, with signs yet to emerge of a pick-up in non-residential construction.”
Westpac on July 15 became the first of Australia’s four largest banks to predict that the RBA’s next move will be a rate cut in December. The Sydney-based bank’s prediction was an outlier in a Bloomberg News survey of 21 economists, in which the median estimate was for a quarter-point increase in November.
Households are saving more as assets including stocks and houses decline in value. A 22 percent rise in the Australian dollar in the past year is hurting the manufacturing and tourism industries.
Rising Currency
The stronger dollar, by reducing import costs, has helped contain inflation while the unemployment rate declined to 4.9 percent in June from 5.8 percent two years earlier. Mining and energy companies are hiring workers to help meet demand from China and India for Australia’s coal and iron ore.
Prime Minister Julia Gillard’s government estimates that mining investment will reach A$76 billion ($81 billion) this fiscal year.
Leaders of euro-area countries are slated to meet July 21 in Brussels to discuss a second aid package for Greece after last year’s 110 billion-euro bailout failed to stop the spread of the debt crisis. Italian two-year note yields have surged the most in more than a year, and yields on notes from Ireland, Portugal and Greece soared to euro-era records.
“The downside risks associated with a possible adverse European financial shock looked more significant than had been the case a few months ago,” today’s minutes said. “Whether the slower global growth would persist was unknown.”
To contact the reporter on this story: Brendan Murray in Sydney at brmurray@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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