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Australia Central Bank Set to Pause on Benchmark Rate

Reserve Bank of Australia Governor Glenn Stevens. Photographer: Luis Enrique Ascui/Bloomberg
Reserve Bank of Australia Governor Glenn Stevens. Photographer: Luis Enrique Ascui/Bloomberg

Dec. 6 (Bloomberg) -- The Reserve Bank of Australia is likely to keep its benchmark interest rate unchanged tomorrow as previous increases slow the economy and reduce the risk of faster inflation.

Governor Glenn Stevens and his board will leave the overnight cash rate target at 4.75 percent in Sydney tomorrow, according to all 25 economists surveyed by Bloomberg News. Stevens told lawmakers in testimony 10 days ago that “there’s unlikely to be anything from us imminently” on borrowing costs.

Australia’s economy probably won’t reach the central bank’s forecast 3.5 percent growth in 2010 after it expanded last quarter at the slowest pace in almost two years, according to Citigroup Inc. Stevens’ aim to contain prices was aided by some of the nation’s largest banks boosting mortgage rates by almost double the RBA’s quarter-percentage-point increase on Nov. 2.

“With rates up in November, inflation under control and the economy losing momentum in the past quarter, clearly now is not the time to be lifting rates further,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. debt crisis there.”

Australia’s currency declined to 99.01 U.S. cents as of 11:33 a.m. in Sydney from 99.31 cents in New York last week. It reached 99.39 cents on Dec. 3, the most since Nov. 22.

Rate Bets

Traders bet there is a 90 percent chance Stevens will leave borrowing costs unchanged through the first quarter of next year, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

The currency declined 2.5 percent against the U.S. dollar over the past month as reports indicated a slowing economy.

Retail sales declined in October by the most since July 2009, according to data released last week, and a private report showed consumer confidence fell in November to a five-month low. Household spending accounts for about half of the nation’s gross domestic product.

Business profits also dropped in the three months through September, the first quarterly decline in more than a year. Lending to businesses slid 0.8 percent in October from September, according to the central bank.

The economy grew 0.2 percent in the third quarter from the previous period, the worst performance since a contraction at the end of 2008, a government report showed on Dec. 1.

Earlier Move

Stevens, in testimony to the House of Representatives Committee on Economics on Nov. 26, said while last month’s decision to raise rates was finely balanced, it was typically better to move earlier than later.

“We have to balance that risk, obviously, against the risk of getting behind the game and historically, for many central banks including us, that has tended to be the mistake that we made,” the governor told lawmakers.

Australia’s currency reached parity with the U.S. dollar in October as traders bet the central bank would boost borrowing costs and the Federal Reserve prepared to pump additional stimulus into the world’s largest economy. The RBA is seeking to contain an expected acceleration in inflation as Australia experiences a resource investment boom that is prompting companies to increase hiring to meet demand from China.

Inflation Gauge

A gauge of Australia’s inflation accelerated in November and surpassed the top of the central bank’s target range for a third straight month.

Consumer prices increased 3.9 percent last month from a year earlier, after advancing 3.8 percent in October, according to an index compiled by TD Securities Ltd. and the Melbourne Institute released in Sydney today. Prices increased 0.4 percent from a month earlier, when they gained 0.3 percent.

Australian job advertisements rose in November by the most in nine months, according to an Australia & New Zealand Banking Group Ltd. report today. Jobs advertised in newspapers and on the Internet advanced 2.9 percent from October, when they increased a revised 0.7 percent, the release showed.

Australian employers probably added 20,000 workers in November, the ninth straight month of gains, according to a separate Bloomberg survey ahead of a Dec. 9 report. Employers have added 301,600 jobs from January to October and the monthly average gain this year is the biggest in at least three decades.

Fortescue Metals Group Ltd., Australia’s third-biggest producer of iron ore, last month approved an $8.4 billion expansion in Western Australia’s Pilbara region to almost triple output as demand from steelmakers gains.

China Steel Mills

It joins Rio Tinto Group, Vale SA and BHP Billiton Ltd. in announcing expansions as prices increase. Producers are seeking to meet demand from steel mills in China, where consumption of the alloy is forecast by Rio Tinto to double by 2020 from 2008 levels.

“On all the indications available, we are living through an event that occurs maybe once or twice in a century,” Stevens said in an address to a Committee for Economic Development of Australia event in Melbourne a week ago. “We obviously have to be wary of overheating.”

The RBA’s quarter-point increase last month was followed by larger rises in the standard variable home-loan rates of Westpac Banking Corp., National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Commonwealth Bank.

That prompted a political backlash and government moves to increase competition in the banking industry. Local politicians are sensitive to increases in borrowing costs as more than 90 percent of Australian borrowers have variable-rate home loans.

The RBA is unlikely to raise rates again before the second quarter of 2011 as the economy is “yet to see the effect of the recent tightening on activity and mortgage rates went up by 40 basis points,” said Paul Bloxham, chief economist for Australia and New Zealand at HSBC Holdings Plc in Sydney and a former RBA official, who previously forecast a move in the first quarter.

“This month’s decision is almost a fait accompli,” he said. The RBA’s next monetary policy meeting is on Feb. 1.

To contact the reporters for this story: Michael Heath in Sydney at mheath1@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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