Australia’s central bank said it decided on “a modest easing” of monetary policy after weighing slower inflation and increased global risks against surging mining investment, minutes of its Nov. 1 meeting showed.
“There had clearly been material changes to the recent course of, and outlook for, underlying inflation over recent months, while the downside risks for the global economy had increased,” the minutes released today by the Sydney-based Reserve Bank of Australia showed.
The RBA’s first rate reduction in 31 months reflects lower forecast growth and inflation over the next two years as Europe’s sovereign-debt crisis dims prospects for the global economy. The central bank said in the minutes that there had also been a case for keeping borrowing costs unchanged to await the expansionary effects of high commodity prices and the resource investment boom.
The weaker inflation outlook meant “a more neutral setting would, on this view, be compatible with achieving sustainable growth and inflation consistent with the target” of between 2 percent and 3 percent, policy makers said in the minutes.
Prior to today’s release, traders bet RBA Governor Glenn Stevens would lower borrowing costs by another quarter percentage point next month and were pricing in some chance of a half a percentage point cut at the RBA’s Dec. 6 meeting. The central bank reduced rates to 4.5 percent on Nov. 1 from a developed-world high of 4.75 percent.
Stevens joined Group of 20 counterparts from Brazil to Indonesia in lowering borrowing costs or increasing fiscal measures to shield growth. Federal Reserve Chairman Ben S. Bernanke said this month a U.S. recovery may be “frustratingly slow.”
While the U.S. economy picked up pace in the third quarter, “growth remained moderate and there was still significant spare capacity,” RBA policy makers said in the minutes. “It was likely that economic conditions in Europe would weaken further over the period ahead, given the effects of the recent turmoil on confidence, likely tightness of credit supply and the need for further fiscal consolidation.”
Bond yields in Italy last week surged past the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts. Stocks and the euro slid yesterday as Italy’s borrowing costs increased to a euro-era record at an auction, deepening concern Europe will struggle to contain its crisis.
Australia’s economy has been driven by demand from nations such as China and India for resources including iron ore and coal. That, and higher rates compared to other developed world nations, spurred the Australian dollar to $1.1081 on July 27, the highest level since it was freely floated in 1983. The currency has since declined 8.6 percent as commodity prices weakened and traded at $1.0199 at 8:41 a.m. in Sydney.
In its quarterly policy statement on Nov. 4, the central bank predicted growth of 4 percent in the 12 months through June 30, 2012, down from its Aug. 5 estimate of 4.5 percent. Consumer prices will rise 2 percent over the period, from a previous prediction of 2.5 percent; underlying inflation is predicted at 2.5 percent from a previous 3 percent, the central bank said. The estimates are based on the overnight cash rate target remaining unchanged, it said.
“Information on economic activity suggested that the pace of growth in demand and output outside the resources and related sectors was a little lower than had been expected earlier in the year,” policy makers said in the minutes. They said the outlook for the mining industry “remained very strong,” with resource investment predicted to increase to 7 percent of gross domestic product by 2013-14.
Demand for Workers
More than 25,000 new workers will be needed to complete mining, natural gas and transportation projects in Queensland state by late-2012, according to the industry-funded group Construction Skills Queensland.
Stevens’s Nov. 1 rate cut, the first reduction since April 2009, boosted consumer confidence in Australia to a five-month high this month. A government report on Nov. 3 also showed retail sales advanced for a third straight month.
“Recent data on economic activity had been a little more positive than in the previous couple of months, although conditions remained subdued in a number of sectors,” policy makers said in the minutes.
Australia’s unemployment rate climbed in July and August before declining in October for the first time in seven months as employers added more workers.
The number of people employed rose by 10,100 after a revised gain of 22,500 in September, a government report showed Nov. 10. The unemployment rate fell to 5.2 percent from a revised 5.3 percent.
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