Australian Central Bank Holds Key Rate, Citing ‘Unsettled’ Global Markets

The Reserve Bank of Australia left its benchmark interest rate unchanged for a ninth straight meeting, citing unstable financial markets and weaker growth prospects at home and abroad.

Governor Glenn Stevens held the overnight cash rate target at 4.75 percent, saying in a statement released today in Perth that “global financial markets have been very unsettled over recent weeks.” The extended pause on rates matched the prediction of all 25 economists surveyed by Bloomberg News.

Australian employers added 41,400 jobs during the first seven months of the year, the weakest January-July period since 2003, as a rising currency hurts manufacturers including BlueScope Steel Ltd. Stevens’s decision to maintain the developed world’s highest borrowing costs reflects a slower global economy that’s dimming the domestic outlook.

“It’s a step in the dovish direction,” said Brian Redican, senior economist in Sydney at Macquarie Group Ltd., Australia’s biggest investment bank, who predicts the RBA’s next move will be a rate cut. “I still think there needs to be a bit more water under the bridge before they start debating a rate cut, but I think we’ve taken one small step in that direction today.”

Currency Reaction

The Australian dollar maintained declines after the decision, trading at $1.0508 at 3:45 p.m. in Sydney from $1.0551 yesterday and $1.0510 before it was announced. Interbank cash- rate futures show investors bet Stevens will cut rates by 75 basis points by December.

Australia’s economy expanded 1 percent last quarter, according to the median of 25 economists in a Bloomberg News survey before a government report tomorrow, after contracting 1.2 percent in the previous three months as mines and farmland were inundated in floods, hurting exports.

The rebound is being driven by A$82.1 billion of projected mining investment in the 12 months ending June 30, 45 percent higher than last fiscal year, as companies such as BHP Billiton Ltd. seek to meet demand from China and India for coal, iron ore and natural gas.

“Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better- than-average conditions,” Stevens said today. “In other sectors, cautious behavior by households and the high level of the exchange rate are having a noticeable dampening effect.”

Stevens’s Speech

Stevens is scheduled to address the Western Australian Chambers of Commerce and Minerals & Energy in Perth tomorrow.

Australia’s jobless rate rose to 5.1 percent in July as employment dropped by 100 workers that month. A report Sept. 8 may show unemployment stayed at that level last month, with the number of workers increasing by 10,000, according to the median estimate of 24 economists surveyed by Bloomberg.

BlueScope, Qantas Airways Ltd. and Westpac Banking Corp. all announced plans last month to trim their workforces as Australian consumers retrench.

Even so, 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 RBA aims to keep underlying inflation in a range of 2 percent to 3 percent on average.

“The board remains concerned about the medium-term outlook for inflation,” Stevens said today. “A key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation.”

Stronger Currency

The RBA has relied on the Australian dollar’s strength to temper gains in consumer prices. The local currency has risen about 15 percent in the past year and reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

“The solid outlook for Australia’s major trading partners means the next move is more likely to be up than down,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore.

Since the RBA’s Aug. 2 meeting, when a rate increase was discussed as an option, reports have shown the first increase in unemployment in nine months and consumer confidence falling to a two-year low. Adding to concern that inflation will quicken were a government report Aug. 17 showing Australian wages accelerating and Sept. 1 figures showing stronger-than-forecast retail sales in July.

Testifying Aug. 26 to a parliamentary panel, Stevens said the RBA’s board last month “judged the most prudent course was to sit still through this period, in spite of inflation data that, on their face, continue to be concerning.”

U.S. Concern

Clouding the outlook is concern the world’s largest economy is slowing. Employment in the U.S. unexpectedly stagnated in August as employers became less confident in the strength of the recovery, and the jobless rate held at 9.1 percent, according to a Sept. 2 report.

In Europe, there’s little sign of a rebound. France’s economy stalled in the second quarter, Germany’s expanded 0.1 percent and the U.K.’s gross domestic product grew 0.2 percent. Joblessness is rising from Russia to Belgium.

Household spending accounts for 55 percent of Australia’s economy, and the central bank sought to restrain consumption with 175 basis points of rate increases from October 2009 to November. That was the most aggressive tightening for a developed economy coming out of the 2009 global recession.

“They’ve gone from debating whether to hike rates in August to firmly thinking rates are on hold in September and they are becoming more cautious about the global outlook,” Redican said, referring to RBA policy makers. “That said, their discussion on Australia is still quite robust.”

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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