— Australian central bank Governor Glenn Stevens's unexpected decision to keep borrowing costs unchanged gives his economy a chance to absorb a record series of rate increases and allow global counterparts to catch up.
"Being the only man hiking is a real problem — if you're that guy the higher exchange rate strangles parts of the economy," said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney.
Policy makers kept the overnight cash rate target at 3.75 percent in Sydney yesterday, confounding the forecasts of all 20 economists surveyed by Bloomberg for a quarter-point move and driving the nation's currency to its lowest level in six weeks. Last year's 28 percent surge against the U.S. dollar, after Stevens became the only central banker from a Group of 20 nation to raise borrowing costs three times, has eroded earnings at exporters including BlueScope Steel Ltd.
"The Australian dollar was everyone's favorite currency last year as investors went back into risk trades," said Mansoor Mohi-uddin, Singapore-based chief currency strategist at UBS AG. "Now, because the central bank has clearly changed the short-term outlook, there will be some more profit-taking by investors who have been long the Australian dollar."
Last year's Australian rate increases helped fuel gains in the nation's currency as investors sought higher-yielding assets in so-called carry trades that Reserve Bank Assistant Governor Guy Debelle said late last year are "back in vogue."
The nation's currency fell yesterday to as low as 87.81 U.S. cents, the least since Dec. 23, from 89.24 cents just before the decision was released. It traded at 88.58 cents at 12:45 p.m. today in Sydney.
Traders are betting there is only a 28 percent chance of a quarter-point move when policy makers meet on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:46 p.m. Prior to yesterday's decision, chances stood at 100 percent.
Keeping borrowing costs unchanged at the central bank's first meeting since Dec. 1 allows policy makers to judge the impact on consumers and businesses of previous increases, Stevens said.
The pause also comes amid signs that global credit conditions "remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness," he said. "Concerns regarding some sovereigns have increased."
Investors concerned that Greece's budget deficit, the biggest in the European Union, will spread to other nations in the region has triggered a 5.1 percent slump in the euro against the yen and a 2.7 percent decline against the dollar this year.
Concerns about the pace of the global recovery have also increased speculation that policy makers in the U.S. and Europe aren't likely to raise borrowing costs any time soon.
Interest rates are "appropriate," European Central Bank President Jean-Claude Trichet said on Jan. 14 after leaving the benchmark at a record low of 1 percent. The Federal Reserve restated its intention last week to keep interest rates near zero for an "extended period," saying the pace of "economic recovery is likely to be moderate for a time."
By contrast, Australia's economy shows signs of strengthening after skirting last year's global recession, boosted by A$20 billion ($18 billion) in cash handouts to consumers from Prime Minister Kevin Rudd.
'Time to Catch Up'
Employers added 135,700 jobs between September and December, the biggest four-month surge in hiring in more than three years, driving unemployment down to an eight-month low of 5.5 percent.
The economy expanded in the three months through September for a third straight quarter and house prices surged 13.6 percent in 2009.
Stevens and his board "were worried about being on their own," said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. The decision to keep rates unchanged "also gives some of the other central banks a chance to catch up, or at least signal that they're moving towards raising rates."
About 35 percent of earnings at publicly traded Australian companies such as Foster's Group Ltd., the world's second- largest winemaker, and steelmaker BlueScope Steel, are affected by gains against the U.S. dollar, Chris Pidcock, a strategist at Goldman Sachs JBWere Pty., estimated in October.
Increased borrowing costs and the "high" Australian dollar triggered a drop in business confidence in December to the lowest level in six months, a survey by National Australia Bank Ltd. showed yesterday.
Australia's trade deficit widened in December as imports of goods including gasoline surged by the most in almost two years, a report showed today. The shortfall swelled to A$2.25 billion from a revised A$1.73 billion in November.
There are also signs Stevens's rate increases in October, November and December are restraining the mortgage market.
Borrowing for home buying fell to a five-year low last month, according to a report this week by Australian Finance Group Ltd., which says it accounts for more than 10 percent of the mortgage market. The group arranged A$1.55 billion of mortgages in January, 19 percent less than a year earlier and the lowest level for any month since 2005.
Most mortgage rates in the economy have increased by about 1 percentage point since October, outpacing the central bank's 75 basis point increase in the benchmark rate, Stevens said yesterday.
Australian & New Zealand Bank Group Ltd. boosted its variable mortgage rate by 35 basis points after Stevens raised the overnight cash rate target by 25 basis points on Dec. 1. Commonwealth Bank of Australia raised its home-loan rate by 37 basis points and Westpac Banking Corp. moved by the largest amount, driving up its mortgage rate by 45 basis points.
Westpac's move means households with a A$300,000 mortgage are being charged an extra A$1,008 a year, instead of the A$576 that would have been imposed had the bank merely passed on the Reserve Bank's increases.
"Interest-rate rises are not good for consumers full stop," Michael Luscombe, chief executive officer of Australia's biggest retailer Woolworths Ltd., said in an interview last week. "I think 2010 is going to be a challenging year."
Households will "welcome this decision and businesses will welcome this decision," Treasurer Wayne Swan told parliament in Canberra yesterday.
Jacob Greber in Sydney at firstname.lastname@example.org