RBA Holds at 4.75% as Stevens Weighs Global Outlook, Sending Dollar Lower
The Reserve Bank of Australia kept the benchmark interest rate unchanged, saying that while its board considered boosting borrowing costs, it was prudent to hold off because of a clouded global economic outlook.
Governor Glenn Stevens held the overnight cash rate target at 4.75 percent in Sydney for a record eighth straight meeting, saying “the board remains concerned about the medium-term outlook for inflation.” He cited “the acute sense of uncertainty” in financial markets as a key factor for inaction.
Stevens’s decision not to raise the developed world’s highest rates reflects concern about slowdowns in the U.S. and China, and Europe’s debt crisis. The local currency dropped by the most in two weeks and the 10-year government bond yield fell below the cash rate for the first time since February 2009.
“The board considered whether the recent information warranted further policy tightening,” Stevens said in today’s statement. “On balance, the board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets.”
The Australian dollar declined after the decision, trading at $1.0923 at 3:37 p.m. in Sydney from $1.0979 immediately before the announcement. Interbank cash-rate futures priced in a 68 percent chance of a rate cut by December.
Brian Redican, senior economist in Sydney at Macquarie Group Ltd. (MQG), Australia’s biggest investment bank, said the market’s reaction to the decision may relate to a reversal of bets on a rate increase. Four economists surveyed by Bloomberg ahead of the announcement predicted a rate rise.
“It was obviously a very close decision,” Redican said. “This is more just a delay of the inevitable rather than a permanent stay of execution.”
The central bank’s two preferred measures of annual inflation accelerated to 2.7 percent in the second quarter, compared with a gain of about 2.3 percent in the first quarter. The central bank aims to keep underlying inflation in a range of 2 percent to 3 percent on average.
“It is appropriate under such circumstances for monetary policy to exert a degree of restraint,” Stevens said today. “Most financial indicators suggest that it has been doing so, as a result of the board’s decisions last year.”
The central bank said last month it will probably lower its 2011 growth forecasts even as inflation accelerates, driven by the expansion of mining companies including BHP Billiton Ltd. (BHP)
Credit growth that’s declined in recent months “is very subdued by historical standards, even with evidence of greater willingness to lend,” he said. Asset prices including housing have “softened” in recent months and the Australian dollar is “high.”
“Each of these variables is affected by other factors as well, but together they point to financial conditions being tighter than normal,” Stevens said.
In Washington late yesterday, the House of Representatives passed legislation that would raise the U.S.’s borrowing authority by at least $2.1 trillion, easing concern about the threat of a default. The measure goes to the Senate for a vote before an Aug. 2 deadline expires.
Clouding the outlook is concern that the U.S. economy has yet to regain the ground it lost during the recession. Gross domestic product expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed July 29.
EU Debt Concern
In Europe, Moody’s Investors Service put Spain’s Aa2 rating on review for a possible cut on July 29, citing funding pressures. That followed a similar step for Italy on June 17. Ten-year bond yields for both nations approached euro-era records last week as the region’s officials failed to convince investors they would halt the spread of the debt crisis after arranging a so-called selective default for Greece.
The RBA has relied on the Australian dollar’s strength to temper gains in inflation. The local currency has risen about 20 percent in the past year and reached $1.1081 on July 27, the highest level since it was freely floated in 1983.
Stevens, 53, also faces a domestic economy showing signs of weakness.
Private reports yesterday showed manufacturing slumped to a two-year low last month and sales of new homes fell the most in five years. Earlier today, government reports showed residential-building permits in June dropped more than economists forecast and house prices fell from April through June for the third quarter in the past year.
The currency’s appreciation mirrors rising global demand for Australian iron ore, coal and other resources.
The RBA has expressed concern that higher consumption will clash with capacity constraints such as skill shortages caused by mining investment that the government estimates will reach A$76 billion ($83 billion) this fiscal year.
Household spending accounts for 55 percent of the economy, and the central bank has sought to restrain consumption with 175 basis points of rate increases from October 2009 to November, letting investment in mining drive growth.
“Precautionary behavior by households also looks likely to keep some areas of demand weaker in the near term than earlier expected,” Stevens said today.
The nation’s saving rate has surged in recent quarters and demand for mortgages has waned to the slowest annual pace since records started in 1977.
“If the RBA can’t hike given recent core CPI prints, then I don’t think they will until the property and retailing sectors pick up markedly,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker.
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