Australia Pausing Rate Cut on European Progress Spurs Currency: Economy

Australia unexpectedly kept interest rates unchanged as two cuts late last year help the economy weather Europe’s debt crisis, sending the nation’s currency soaring to a six-month high.

“Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made,” Reserve Bank Governor Glenn Stevens said in a statement today announcing the official cash rate target will stay at 4.25 percent, the highest level among the world’s major developed economies. “Financial market sentiment, though remaining skittish, has generally improved since early December.”

Stevens’s first rate decision of the year reflects confidence the U.S. and Chinese economies will withstand a European recession and domestic unemployment will stay close to 5 percent as A$456 billion ($492 billion) in resource projects boost hiring. He signaled today a willingness to lower borrowing costs if conditions warrant an easing of monetary policy.

“The bias is still to cut, that much is clear,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker, who predicted today’s decision. “But they’ve tied it to a weakening in demand, which is appropriate.”

Carr was one of three economists surveyed by Bloomberg News to predict a pause. The other 24 forecast a quarter-percentage- point reduction.

Stocks Steady

Asian stocks swung between gains and losses. The MSCI Asia Pacific Index rose 0.2 percent at 3:51 p.m. in Tokyo. Australia’s S&P/ASX 200 Index slipped 0.5 percent in Sydney today, erasing earlier gains of as much as 0.4 percent.

Australia’s currency strengthened to as much as $1.0811 in Sydney, the highest since Aug. 2, compared with $1.0705 immediately before the decision was announced. The Australian dollar, the world’s fifth-most traded currency, has increased 5.7 percent this year.

Interbank cash-rate futures for March were yielding 4.115 percent, indicating traders expect Stevens to lower rates that month.

Stevens trimmed the nation’s benchmark interest rate by a quarter percentage point to 4.5 percent on Nov. 1 and to 4.25 percent Dec. 6 to help revive household demand and hiring.

Even after the reductions, Australia’s borrowing costs are higher than other industrial nations. Policy rates in Japan and the U.S. are near zero, while the European Central Bank has its benchmark at 1 percent.

‘Easier’ Policy

“Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy,” Stevens said in the statement today.

Elsewhere in Asia, the Indian government said today economic growth probably slowed to 6.9 percent in the year through March from 8.4 percent in 2010-2011. The forecast is less than the 7 percent median estimate in a Bloomberg News survey of 15 economists.

Chinese stocks fell after the country’s Ministry of Industry and Information Technology said industrial output growth is likely to slow this quarter as the world economy cools and Europe’s debt crisis worsens. The Shanghai Composite Index tumbled 1.7 percent at the close today.

Taiwan may say today exports fell 17 percent last month from a year earlier, after increasing 0.6 percent in December, according to the median estimate of 11 economists surveyed by Bloomberg News. The island’s Ministry of Finance is scheduled to announce trade data, including imports and total trade balance, at 4 p.m. in Taipei.

European Industry

Germany, Denmark, Norway and the Netherlands will be among European nation releasing industrial production data today. Output probably stagnated in December from a month earlier in Germany and the Netherlands, and climbed at a faster pace in Denmark, according to the median estimates by economists surveyed by Bloomberg.

In the U.S., an index of economic optimism probably rose to 48.6 this month from 47.5 in January, according to a Bloomberg survey of economists before the release by Investors Business Daily and TechnoMetrica Market Intelligence. A reading below 50 signals a negative outlook.

For Australia’s central bank, Chinese demand for the nation’s commodities is helping propel the domestic economy even as global expansion slows.

“Growth in China has moderated as was intended, but on most indicators remained quite robust through the second half of last year,” Stevens said today. “Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels.”

Australia’s trade surplus soared to a record in 2011 on coal and iron ore shipments, a Feb. 2 government report showed, as exports outpaced imports by A$19.3 billion.

Demand for Australian resources and rates that were 2.25 percentage points higher than any other developed nation spurred the Australian dollar to $1.1081 on July 27, the highest level since it was freely floated in 1983.

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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