RBA Should Keep Rates Low as Mining Peak Saps Growth, OECD Says

Photographer: Ian Waldie/Bloomberg

Steam surrounds bucket wheel reclaimers as they operate at the Newcastle Coal Terminal in Newcastle, north of Sydney. Close

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Photographer: Ian Waldie/Bloomberg

Steam surrounds bucket wheel reclaimers as they operate at the Newcastle Coal Terminal in Newcastle, north of Sydney.

Australia’s central bank should keep interest rates low as a high currency and fragile confidence inhibit growth needed to compensate for a mining slowdown, the Organization for Economic Cooperation and Development said.

Gross domestic product growth will slow to 2.6 percent in 2013, down from 3 percent projected in November, the OECD said in a report released in Paris yesterday. With the economy slowing, the government’s “gradual approach” to reducing the public deficit is welcome, it said.

“The surge in mining investment, which is likely to peak in 2013, is gradually losing its stimulatory effect on activity, while new drivers of growth are taking time to emerge,” it said. “Signs of an upturn in the non-mining sector, which the easing of monetary conditions aims to stimulate, remain timid because of the persistently high exchange rate, which is weighing on companies’ confidence and their investment.”

Reserve Bank of Australia Governor Glenn Stevens and his board slashed borrowing costs by 2 percentage points over the past 19 months to 2.75 percent, joining global counterparts in embracing record-low rates to combat currency strength. The government in December abandoned a pledge to return the budget to surplus this fiscal year and this month projected a deficit of A$19.4 billion ($18.7 billion).

Traders are pricing in a 75 percent chance the RBA will lower its benchmark borrowing cost by at least a quarter percentage point to 2.5 percent or lower by the end of September, swaps data compiled by Bloomberg show. The Australian dollar, which has declined 7.1 percent this month, averaged about $1.0350 in the past two years, versus 75.80 U.S. cents in the prior 10 years.

New Zealand

In New Zealand, growth is picking up, bolstered by rebuilding after quakes that rocked the South Island city of Christchurch and increasing domestic demand, the OECD said. The Reserve Bank of New Zealand, which has kept borrowing costs at a record low of 2.5 percent since March 2011 to help the economy recover, should tighten policy next year before inflation pressures “become pronounced,” the OECD said.

“As earthquake rebuilding gains traction, diminishing excess capacity will begin to generate cost pressures,” the OECD said. “The Reserve Bank should thus gradually withdraw monetary stimulus beginning in 2014.”

RBNZ Governor Graeme Wheeler said today the central bank is prepared to increase currency sales to combat a “significantly over-valued” exchange rate, according to e-mailed notes of a speech in Auckland.

A pronounced slowdown in China is a risk to both Australia and New Zealand, the OECD said.

To contact the reporter on this story: Malcolm Scott in Sydney at mscott23@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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