Stevens Lets Currency Do ‘Heavy Lifting’ on RBA Rate Policy

Reserve Bank of Australia Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Mark Graham/Bloomberg

Reserve Bank of Australia Governor Glenn Stevens is betting a stronger currency will help contain inflation and allow him to extend an interest-rate pause to help the economy recover from a possible first-quarter slump.

Stevens held the overnight cash rate target at 4.75 percent for a fourth straight meeting yesterday, and said in a statement after the decision that inflation consistent with the Sydney-based central bank’s goal is “being assisted by the high level of the exchange rate.”

Australia’s currency has surged about 13 percent in the past year as a mining investment boom tightened the labor market and used up spare capacity, threatening to stoke consumer prices. HSBC Holdings Plc estimates that a 5 percent appreciation in Australia’s exchange rate in the “medium term” against currencies of its major trading partners may mean one fewer 25 basis-point increase in rates may be needed.

“The higher the currency rises and the more the gains are sustained, the less work the RBA has to do,” said Jarrod Kerr, director of Australia rates strategy at Credit Suisse AG in Singapore, which forecasts the local dollar will climb to $1.05. “A stronger currency is exactly what the RBA wants.”

Australia’s dollar, the world’s fifth-most traded currency, rose to $1.0368 at 12:14 p.m. in Sydney today from $1.0329 in New York yesterday. It touched a record $1.0417 on April 4.

‘Heavy Lifting’

The currency’s strength has helped slow parts of the country’s economy, with a report last week showing manufacturing shrank in March for the sixth time in seven months.

“The free-floating Australian dollar has done much of the heavy lifting for the bank, passing restrictive financial conditions most pointedly to those who are best able to afford them in the export-led resources sector,” said Sean Keane, managing director of Triple T Consulting, a financial advisory company in Auckland.

The local dollar should continue to appreciate for the rest of this year, especially if Federal Reserve Chairman Ben S. Bernanke is slow to signal higher rates in the U.S., Keane said.

Prime Minister Julia Gillard said last month she’s worried about the stresses posed by the appreciation of the dollar on areas of the economy outside the China-fueled mining industry.

Australian ‘Burdens’

“I’m concerned about the burdens that this places on some industries and some parts of the country,” Gillard said in a March 3 interview. “I’m very conscious that a strong Australian dollar has benefits and it has burdens. It certainly has burdens for some of our industries like manufacturing and tourism.”

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.

Employment growth “has moderated,” inflation is consistent with the central bank’s goal and the currency’s strength is helping ease prices pressures, Stevens said.

Australian employers probably added 24,000 jobs in March and the unemployment rate held at 5 percent for a third straight month, according to the median estimate in a Bloomberg News survey of 25 economists before a report tomorrow.

Rate Pause

Increased demand for skilled workers at projects such as Chevron Corp.’s A$43 billion Gorgon liquefied natural-gas project, under construction in Western Australia, threatens to stoke wage growth and inflation.

“The labor market will tighten up further over coming months and inflation will rise, requiring the RBA to lift rates early in the second half, July or August,” said Paul Bloxham, chief economist at HSBC in Sydney and a former Reserve Bank official. “A key risk to this is further exchange-rate strength, which could do some of the RBA’s work for it.”

The Reserve Bank, which raised rates seven times from October 2009 to November last year, is pausing as the country recovers from flooding and cyclones in Queensland state. Australian growth accelerated to 0.7 percent in the fourth quarter, from a revised 0.1 percent three months earlier.

Tropical Cyclone Yasi in February tore through sugar- and banana-producing areas, following two months of flooding in Queensland that killed 36 people, shut mines and wiped out crops. The state produces 80 percent of the coking coal exports from Australia and grows more than 30 percent of the nation’s fruit and vegetables.

Queensland Damage

Treasurer Wayne Swan said this week the disasters will likely cost the economy about A$9 billion after the government raised estimates on losses to the coal industry by 20 percent.

Australia’s trade balance unexpectedly swung to a deficit in February for the first time in almost a year as disruptions from natural disasters cut mining shipments, a government report showed yesterday.

The shortfall ended a 10-month run of trade surpluses, the longest stretch since 1972-1973, Westpac Banking Corp. economists led by Bill Evans said. The “much weaker than expected” trade figures mean the economy may have contracted 0.2 percent in the first quarter, according to Westpac.

Australian home-loan approvals declined in February at more than twice the pace economists forecast as the disasters disrupted the housing market, a government report showed today.

The number of loans granted to build or buy houses and apartments dropped 5.6 percent from January, when they fell a revised 6.3 percent. That compares with the median estimate for approvals to slip 2 percent in a Bloomberg News survey of 21 economists.

“The natural disasters over the summer have reduced output and the resumption of coal production in flooded mines is taking longer than initially expected,” Stevens said in a statement after yesterday’s decision. “Commodity prices, including oil prices, have risen over recent months, pushing up measures of consumer price inflation in many countries.”

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