RBA Extends Pause on Key Interest Rate as Inflation Slows

RBA Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

March 1 (Bloomberg) -- The Reserve Bank of Australia left its benchmark interest rate at the highest level in the developed world, saying a stronger currency and forecast slowing in employment growth will help to control inflation.

Governor Glenn Stevens held the overnight cash rate target at 4.75 percent today, as forecast by all 25 economists surveyed by Bloomberg News. In a statement, he called monetary policy “mildly restrictive” and appropriate given the economic outlook.

Stevens refrained from offering a sign he’s ready to resume raising rates in coming months after boosting borrowing costs seven times from October 2009 to November last year, spurring the currency to parity with the U.S. dollar. Bond investors have raised bets on higher inflation in recent months as a mining investment boom drives unemployment below 5 percent.

“The RBA seems pretty comfortable with where policy is as they’re ahead of the curve, having gained a bit of time from slower fourth-quarter inflation,” said Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney who expects a rate rise in the second quarter. “They’re describing commodity prices picking up and the terms of trade flowing through to investment, so there’s still a tightening bias.”

The central bank expects inflation to stay within its target range of 2 percent to 3 percent over the next year, Stevens said in a statement in Sydney.

Currency’s Rise

“Inflation is consistent with the medium-term objective of monetary policy,” the RBA governor said. “These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices.”

One-year inflation swaps show traders betting that consumer prices will climb 3.41 percent. The swaps have risen 49 basis points since December, heading for the biggest quarterly gain since September 2009.

The Australian dollar, the world’s fifth-most traded currency, touched a record $1.0256 on Dec. 31 and is about 13 percent stronger than a year ago. The currency weakened after the announcement, trading at $1.0167 as of 3:01 p.m. in Sydney from $1.0185 before the release.

Treasurer Wayne Swan said Feb. 8 that damage from floods and cyclones may cause first-quarter gross domestic product to contract. Economists’ forecasts ahead of tomorrow’s GDP report on the fourth quarter of 2010 range from a 0.3 percent expansion to a 1 percent increase.

Natural Disasters

“Production losses due to weather are temporarily raising prices for some agricultural produce, but these should fall back later in the year,” Stevens said today. He also said reports of skill shortages “remain confined, at this point, to the resources and related sectors.”

Most leading indicators suggest “further growth in employment, though most likely at a slower pace,” Stevens said. “After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.”

Data in recent days have shown Australian wages grew at the fastest annual pace in almost two years and business investment reached a record as Chinese and Indian demand for commodities capped a year of unprecedented job growth.

Stevens is relying on lower household spending and higher savings to slow price gains and give him scope to delay rate increases. Investors bet there is a 52 percent chance he will raise borrowing costs in August, bank bill futures indicate.

RBA ‘On Hold’

“The RBA is likely to remain on hold for a few more months, pending confirmation of a broader tightening in the labor market or a change in the bank’s inflation forecast,” said Ivan Colhoun, head of Australian economics at Australia & New Zealand Banking Group Ltd. “We continue to expect that these pressures are more likely to be to the upside as the investment boom progresses.”

Australian consumer prices advanced 0.4 percent in the fourth quarter from three months earlier, the slowest pace in almost two years, as a stronger currency lowered costs for household appliances, clothing and cars from abroad.

The currency’s surge has been propelled by demand for iron ore and coal from Australia’s biggest trading partner, China, which has raised rates three times since mid-October. A Feb. 15 report showed China’s inflation exceeded the government’s 2011 target for a fourth month.

‘Lengthy Periods’

Stevens has kept Australia’s overnight cash rate target unchanged in the three meetings since a quarter percentage-point increase in November. In testimony to a parliamentary panel last month, he signaled the RBA was comfortable with borrowing costs.

“We’re ahead of the game, which is where you want to be, and that’s the thing that affords you periods of sitting, waiting and watching,” the governor told lawmakers in Canberra on Feb. 11. “Sometimes, they can be reasonably lengthy periods.”

Australia’s economic growth probably accelerated to 0.6 percent last quarter, according to the median estimate in a Bloomberg News survey of 25 economists before a report tomorrow.

Driven up by mining jobs, wages grew 3.9 percent in the three months through December from a year earlier, the fastest pace since the first quarter of 2009, a Feb. 23 government report showed. The gap between the RBA’s weighted median measure of inflation and the annual wage price index is the widest in six years.

BG Group Plc, based in Reading, U.K., said Oct. 31 it will begin work on a $15 billion liquefied natural gas venture in Queensland, generating 5,000 jobs. BG, Chevron Corp., Royal Dutch Shell Plc and ConocoPhillips are among companies investing about A$200 billion ($203.7 billion) in proposed LNG projects in Australia.

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

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