RBA Sees Steady Rates as Growth Weighed by Budget Cutbacks

Photographer: Patrick Hamilton/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia. Stevens has held borrowing costs as the government prepared a fiscal tightening strategy set to drag on growth. Close

Glenn Stevens, governor of the Reserve Bank of Australia. Stevens has held borrowing... Read More

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Photographer: Patrick Hamilton/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia. Stevens has held borrowing costs as the government prepared a fiscal tightening strategy set to drag on growth.

Australia’s central bank signaled it will keep interest rates low for some time as inflation is contained and the economy adjusts to fewer resource projects.

“Overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation,” the Reserve Bank of Australia said in minutes released today of its May 6 meeting, where it kept the cash rate unchanged at 2.5 percent. “The current accommodative stance of policy was likely to be appropriate for some time yet.”

Governor Glenn Stevens has held borrowing costs as the government prepared a fiscal tightening that’s set to drag on growth. Markets and most economists predict he’ll keep policy steady for the rest of this year to prevent a growth gap as mining companies scale back development. Low borrowing costs are driving up home prices, underscoring why the RBA may be reluctant to add to 2.25 percentage points of rate cuts since late 2011.

“A sustained increase in dwelling investment was in prospect, consumption had strengthened a little and business conditions were around average levels,” policy makers said in the minutes. “With growth in activity expected to pick up only gradually, and spare capacity in the labor market consequently remaining for some time, growth in domestic costs was forecast to remain contained.”

In a departure from previous statements, the RBA omitted commentary on the currency’s level versus historical standards in its section discussing considerations for policy.

Aussie Dollar

Australia’s dollar held declines after the minutes were released and traded at 92.99 U.S. cents at 1:46 p.m. in Sydney. The Aussie dropped 14 percent last year, the steepest decline after the yen among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes.

“One might expect to see reduced capital inflows in the period ahead, with the possibility of a consequent further decline in the Australian dollar,” RBA Assistant Governor Guy Debelle said in a speech in Adelaide today.

Still, demand for Australian government debt “remains robust” and Japanese investors may be a source of additional demand, Debelle said.

Loose monetary policy has boosted household spending and confidence, with Coles supermarkets and Woolworths Ltd. among companies hiring. The nation’s unemployment rate unexpectedly held at 5.8 percent in April.

‘Positive Signs’

Australia needs non-mining industries to grow more rapidly to keep unemployment low, Secretary to the Treasury Martin Parkinson said in a speech in Sydney today.

“We are seeing some positive signs, particularly in the household sector,” he said. “But with businesses in the non-resources sectors continuing to exercise caution in their investment and hiring decisions, the forward indicators suggest that it will be at least another year or two before strong broad-based growth takes hold.”

The government said May 13 it will cut spending on welfare and the public service and impose a tax on the highest paid as it sets a path to a budget surplus. In the days that followed, opinion polls showed a high proportion of voters said they believed the changes would hurt their finances, and support for the government dropped.

AAA Rating

Prime Minister Tony Abbott told reporters today that Australia’s AAA rating may come under threat if opposition lawmakers block efforts to curb spending. Some measures in the budget will need to be approved in the Senate, where Labor and the Greens combined hold the balance of power until July 1, when it shifts to the Palmer United Party -- led by mining magnate Clive Palmer.

The opposition and Palmer have signaled they will oppose the reindexation of fuel excise and making patients pay A$7 for each doctor visit. Labor leader Bill Shorten has said his party would also oppose the government’s proposed cuts to subsidized prescription drugs, welfare and family tax payments.

Australia’s top credit rating isn’t immediately at risk, Standard & Poor’s said today.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Malcolm Scott at mscott23@bloomberg.net Chris Bourke

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