RBA Rates Seen on Hold by Second-Best Bonds: Australia Credit

The bond market is telling Reserve Bank of Australia Governor Glenn Stevens he doesn’t need to raise the developed world’s highest interest rates any time soon to curb a lending surge and the fastest inflation since 2006.

The 10-year government bond yield rose one basis point, or 0.01 percentage point, to 5.44 percent today, after dropping for a third week in the longest stretch of declines since August. Australian bonds returned 2.1 percent over the past six months, better than 18 of 19 other developed markets, according to Bank of America Merrill Lynch indexes. Data last week showed consumer prices rose 1.6 percent in the first quarter and bank loans to households and businesses grew the most in two years.

Stevens, the only developed-nation central banker whose economy avoided recession as credit markets froze in 2008, has said the RBA will “look through” inflation after floods devastated Queensland state, indicating he is likely to leave the overnight cash rate target at 4.75 percent tomorrow for a fifth straight meeting. Bank bill futures for July show a 74 percent chance of no rate change until the third quarter at the earliest. Australia’s benchmark contrasts with near-zero levels in Japan and the U.S., helping drive the currency to a record.

“The soaring exchange rate is helping to contain inflation,” said Paul Bloxham, chief economist at HSBC Holdings Plc in Sydney and a former RBA official. “A key risk is that a tight labor market leads to a wage-price spiral down the track.”

Nearly Unanimous

The RBA will keep the overnight cash rate unchanged tomorrow, according to 21 of 22 economists surveyed by Bloomberg News. Stevens has refrained from raising borrowing costs since November after flooding damaged crops and disrupted coal mines in Queensland, which supplies more than 30 percent of the nation’s fruit and vegetables.

The Australian dollar touched a record $1.1011 today after an April 27 inflation report prompted speculation the RBA will raise rates sooner than the Federal Reserve. The so-called Aussie soared about 18 percent against the U.S. dollar in the past year as Stevens lifted rates and a mining-investment boom drove unemployment below 5 percent.

One economist, Stephen Roberts of Nomura Holdings Inc., is predicting a quarter percentage point increase tomorrow.

‘Move Earlier’

“It would be difficult for the RBA to contend now that inflation is going to stay consistent with the target band over the course of the next 12 months,” said the Sydney-based Roberts. “The least line of regret would seem to be to move earlier rather than later and that implies moving in May. They may choose to herald an increase and maybe wait until June, but I don’t see the benefit of that.”

Bank bill futures for December delivery dropped to the lowest in almost two months on the Sydney Futures Exchange today. The contracts are indicating an 88 percent chance the RBA will boost borrowing costs by year-end after the CPI data showed measures that strip out volatile prices such as food and energy exceeded economists’ forecasts.

Consumer prices may rise an annual 3.06 percent in the next five years, according to the gap between yields on government bonds and inflation-indexed notes, which has widened 10 basis points in the past week. The RBA aims to keep inflation in a range of 2 percent to 3 percent on average.

Lending Jumps

A central bank report last week showed loans provided by Australian banks and finance companies increased 0.6 percent in March from the previous month, matching the biggest monthly advance since January 2009.

Lending to companies surged 1 percent in March, the biggest rise since October 2008 and the third straight monthly gain, it showed. Business lending had declined for six consecutive months through December, falls noted by the RBA in its statements.

Economists will be watching for any change in language from the RBA in its statement, with the bank expected to match its longest stretch without an interest-rate change in more than 3 1/2 years. The central bank has held policy for five-straight meetings on three occasions since 2007, raising rates in November 2010 and October 2009, after ending such a pause in October 2008 with a reduction in the benchmark.

“We think tougher language is likely,” said Kieran Davies, a Sydney-based economist at Royal Bank of Scotland Group Plc, who doesn’t expect rates to climb until August.

Record Jobs

Australia had its biggest annual increase in jobs on record last year and employers added more workers in March than economists forecast, pushing the jobless rate down to 4.9 percent. Short-term government bond yields are signaling that the nation’s growth will overcome disruptions from damage in Queensland and Japan’s strongest-ever earthquake, which Treasurer Wayne Swan said will reduce commodity exports by A$2 billion.

Yields on Australian two-year government debt, which tends to be more influenced by expectations for monetary policy than longer-term bonds, climbed three basis points to 4.98 percent today, extending their first weekly advance since the five days ended April 8. The securities’ premium over U.S. Treasuries of similar maturity widened six basis points over the past week to 436, paring its decline from 456 on Dec. 31.

New Zealand government bonds provided a 3.1 percent return, the best performance among Merrill Lynch indexes. All the other sovereign debt gauges fell, as concerns about inflation and increased borrowings spurred declines from Ireland to Germany, Japan and the U.S.

Treasuries, Bunds

U.S. government bonds handed investors a loss of 1.5 percent, while German bunds dropped 3.7 percent, Japanese debt fell 0.8 percent and Ireland’s securities plunged 12 percent, the Merrill indexes show. Standard & Poor’s on April 18 placed a “negative” outlook on the U.S.’s AAA ranking, citing a risk the nation will fail to deal with rising budget deficits.

Stevens has said the central bank’s management of the resources bonanza has been aided by households restraining spending. Savings as a share of disposable income climbed to 9.7 percent from October through December, rising for a fourth-straight quarter, from 8 percent in the year-earlier period, according to Bureau of Statistics data.

BHP Billiton Ltd., the world’s No. 1 mining company, may expand its iron ore operations in Western Australia’s Pilbara region to 480 million metric tons a year at a cost of A$48 billion ($52 billion), the Australian newspaper reported last month, citing state and federal applications.

Import Costs

While the currency’s rise to the highest level since it was freely floated in 1983 has eased the RBA’s task of controlling inflation by reducing import costs, it has hurt some manufacturers that sell goods abroad.

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. It will update those estimates in its quarterly monetary policy statement to be released on May 6.

Stevens boosted the benchmark lending rate by 175 basis points from early October 2009 to November last year from a half-century low of 3 percent during the global financial crisis. The last increase surprised most economists who predicted no change.

“I don’t think the RBA has to hold the market’s hand the whole time,” Nomura’s Roberts said. “This is very similar to the change they made back in November because that one took the market by surprise as well.”

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