RBA May Extend Rate Pause, Averting Damage to Gillard

Julia Gillard
Julia Gillard, Australia's prime minister, speaks during a news conference at Government House in Canberra, Australia. Photographer: Joseph Lafferty/Bloomberg

Australia’s central bank may keep its benchmark interest rate unchanged for a third month after inflation slowed, averting an increase in mortgage costs that risked damaging Prime Minister Julia Gillard’s election campaign.

Reserve Bank of Australia Governor Glenn Stevens and his board will leave the overnight cash rate target at 4.5 percent at 2:30 p.m. in Sydney tomorrow, according to all 23 economists surveyed by Bloomberg News.

Consumer prices rose the least in three years last quarter, giving scope to extend the rate pause after six increases since early October. Gillard, level with or behind opposition leader Tony Abbott in some polls ahead of the Aug. 21 vote, is relying on holding electorates in western Sydney and the state of Queensland that have large numbers of households with mortgages.

“The Reserve Bank doesn’t need to touch rates, and it can stay on the sidelines for a number of months,” said Craig James, a senior economist at Commonwealth Bank of Australia. “You’ve got inflation at normal levels so this time around the bank can feel pretty relaxed.”

Traders calculate no chance of a quarter-percentage-point increase in the benchmark rate to 4.75 percent, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 10:29 a.m. Prior to last week’s second-quarter inflation report, there was a 28 percent chance of an increase.

‘Good News’

“There won’t be any rise in interest rates and that’s good news for Labor,” said Malcolm Mackerras, a visiting fellow in political science at the University of New South Wales in Sydney, who has written books on Australian politics and devised a gauge known as the “Mackerras pendulum” to determine how big a swing in support is needed to pick up key districts. “The seats that are likely to change hands are very often mortgage-belt seats.”

Former Prime Minister John Howard was ousted in a November 2007 election two weeks after the RBA boosted its benchmark rate to what was then the highest level in nine years. The majority of Australian mortgages are floating-rate loans.

This time around, signs of contained inflation are helping Gillard. Australia’s quarterly inflation report on July 28 showed that core prices, as measured by the central bank’s so-called trimmed mean gauge, rose 2.7 percent in the second quarter from a year earlier. Stevens aims to keep price gains between 2 percent and 3 percent.

A separate gauge of Australia’s inflation published today by TD Securities Ltd. showed consumer prices rose 0.1 percent in July from June, the smallest gain in five months.

Regional Bent

The governor has led policy makers around the Asia-Pacific region by returning borrowing costs to what he has described as “average” levels, on evidence that Australia’s economy, one of few to skirt last year’s global recession, is strengthening thanks to Chinese demand for raw materials.

New Zealand boosted its benchmark rate last week for a second straight month, and India’s central bank increased a key rate on July 27 by more than economists forecast. Malaysia has raised borrowing costs three times this year, while Korea and Thailand increased them once.

Australia’s rate moves have also helped stoke an 8.8 percent gain in the nation’s currency against the U.S. dollar in the past 12 months, the third-best performer among the 16 most actively traded currencies. The currency traded at 90.98 U.S. cents at 10:54 a.m., up from 90.39 cents late on July 30.

Inflation Outlook

“The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” the bank said in minutes of its July 6 meeting released in Sydney last month.

The bank’s forecast for second-quarter inflation published three months ago almost matched the 2.7 percent rate announced last week. RBA economists will issue their latest predictions for inflation and economic growth on Aug. 6.

Policy makers may resume raising borrowing costs at the end of 2010 as the economic rebound worsens a skills shortage that threatens to stoke wage growth. That may be particularly true in Western Australia, where Chevron Corp.’s A$43 billion ($39 billion) LNG gas project is under construction.

Australia’s jobless rate was 5.1 percent in June, below Japan’s level and almost half that of the U.S. Western Australia’s rate was 4 percent.

Retail Sales

Retail sales probably rose in June for a fourth straight month, matching the longest run of gains since early 2009, when the government distributed more than A$10 billion in cash handouts to consumers, a report may show tomorrow, according to analysts surveyed by Bloomberg News.

Manufacturing growth expanded in July for a seventh straight month, according to the Australian Industry Group’s performance of manufacturing index published today. The index advanced 1.5 points to 54.4. A figure above 50 signals the industry is growing.

Rate increases are particularly sensitive for political leaders in Australia, where more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

Stevens’ six rate increases since October added about A$3,600 a year to loan repayments on an average A$300,000 mortgage.

A report published today by the Housing Industry Association showed sales of newly built dwellings dropped 5.1 percent in June from May.

The Liberal-National Coalition has drawn level with the ruling Labor party in popularity, a Newspoll opinion survey published by the Australian newspaper today showed. Both sides have 50 percent voter support, with Labor dropping 2 percentage points from a week earlier, and the opposition advancing by the same amount, according to a telephone survey of 1,137 voters taken between July 31 and yesterday. The margin of error is 3 percentage points.

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