April 4 (Bloomberg) -- Reserve Bank of Australia Governor Glenn Stevens will hold interest rates unchanged for the longest period of his tenure as a weaker Japanese economy slows exports and eases inflation expectations, money markets show.
Stevens will keep the overnight cash rate target at 4.75 percent tomorrow, the highest benchmark in the developed world, according to all 25 economists surveyed by Bloomberg News. Borrowing costs, which haven’t risen since November, won’t increase until at least September, and traders see a 34 percent chance of an increase in December, bank bill contracts on the Sydney Futures Exchange show.
Speculation Stevens will hold off boosting rates to assess the economy’s reaction to Japan’s March 11 earthquake and nuclear crisis contrasts with central bankers from Frankfurt to Beijing who are combating inflation with higher rates or by signaling tighter monetary policy. His inaction narrowed the spread between two-year Australia and U.S. Treasury note yields to a six-month low of 4.09 percentage points March 29. The gap ended last week at 4.15 percentage points.
“The uncertainty from the impact on exports stemming from the Japanese earthquake suggests little urgency for the RBA to exercise its tightening bias,” said Su-Lin Ong, a fixed-income strategist at RBC Capital Markets in Sydney. “The long-run fundamentals suggest the case will become more compelling in the second half of this year.”
Futures markets show investors are less confident that Stevens will lift rates this year than they were in early March before the quake, when the odds of an increase by December were 100 percent. Ong forecasts one increase this year, in the fourth quarter.
Signs are emerging that the temblor in Japan, Australia’s second-biggest export market, poses a widening threat to the region’s economy. A government report last week showed that Japanese manufacturing deteriorated at the fastest pace in at least nine years in March. Honda Motor Co. and Sony Corp. are among companies that halted production after the disaster.
European confidence in the economic outlook worsened in March, after Japan’s earthquake and surging energy costs clouded global growth prospects. Japan’s crisis is likely to cut global expansion this year by 0.5 percentage point to 3.8 percent, according to Morgan Stanley.
Stevens held the policy rate for the past three meetings after boosting borrowing costs seven times, from 3 percent in September 2009 to 4.75 percent in November 2010. Economic growth accelerated in the final three months of last year, the eighth straight quarterly expansion, before the worst floods in 37 years hit Australia’s northeast in January.
In minutes of its March 1 meeting, the Reserve Bank said it left rates unchanged as slower borrowing by households and businesses offset a mining investment boom.
Australia’s household savings approached 10 percent of incomes last year, up from 1.5 percent in 2007, and retail sales declined 0.3 percent in the fourth quarter, the first drop in more than a year. Australian consumer confidence fell to a nine-month low in March.
The nation is undergoing a surge in resource investment as mining and energy firms boost output to meet demand from China and India. Australia’s dollar, the world’s fifth-most traded currency, climbed 13 percent over the past year and touched a record $1.0397 on April 1.
The currency’s strength has helped slow the economy and reduce the need for the central bank to raise rates quickly. A report last week showed Australian manufacturing contracted in March for the sixth time in seven months as the stronger dollar made exports more expensive.
“If the exchange rate persists at a high level or appreciates further, it puts downward pressure on inflation,” said Paul Bloxham, the chief economist at HSBC Holdings Plc in Sydney and a former Reserve Bank official. “In this way the exchange rate will do some of the RBA’s work for it.”
Increased demand for skilled workers at projects such as Chevron Corp.’s A$43 billion ($44.4 billion) Gorgon liquefied natural-gas project, under construction in Western Australia, threatens to stoke wage growth and inflation. BG Group Plc, Chevron, Royal Dutch Shell Plc and ConocoPhillips are among companies planning to invest about A$200 billion in proposed liquefied natural gas projects in Australia.
Australian consumer prices may rise an annual 2.95 percent in the next five years, according to the gap between yields on government bonds and inflation-indexed notes. The RBA aims to hold inflation between 2 and 3 percent on average.
Mining companies have helped tighten Australia’s labor market, which posted record job creation last year. As natural disasters disrupted commerce at the end of last year, the economy lost a net 2,300 jobs from December through February after gaining 362,800 during the first 11 months of 2010, according to the statistics bureau.
The boom has sent wages soaring for mining company workers, prompting National Australia Bank Ltd. to say markets are underestimating the likelihood of higher rates to contain inflation.
Wages grew 3.9 percent in the three months through December from a year earlier, the fastest pace since the first quarter of 2009, according to government figures.
Government bonds returned 1.8 percent in Australia this year, the third-best performance among 19 developed markets, according to Bank of America Merrill Lynch indexes.
Gains have been spurred by Stevens holding rates, new banking rules that mean banks need to buy more of the safest debt and Prime Minister Julia Gillard’s pledge to reduce the budget deficit in the developed world’s second-smallest government bond market.
Gillard announced spending cuts and a one-time tax to fund at least A$5.6 billion in federal government spending on flood reconstruction without jeopardizing her goal of returning the budget to surplus by 2013.
Rains in Queensland during December and January have compounded concerns about labor shortages. The storms flooded about 30,000 properties, shut coal mines, cut rail lines and damaged crops. An area the size of Egypt was declared a disaster zone, including parts of the state capital, Brisbane.
The Reserve Bank raised its forecast for 2011 growth to 4.25 percent in February, from a November prediction of 3.75 percent, saying flood rebuilding will accelerate in the second half.
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