RBA Saw Inflation Outlook as ‘Less Concerning,’ Minutes Show

Reserve bank of Australia Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Patrick Hamilton/Bloomberg

Australia’s central bank saw scope to reduce the nation’s benchmark interest rate from a developed-world high if needed as a slower domestic economy eased inflation concern, minutes of its Oct. 4 meeting showed.

“It was likely that growth over the forecast period would be somewhat slower and that the labor market would be less tight than forecast,” the minutes released today by the Sydney-based Reserve Bank showed. “This prospect, as well as the lower starting point for inflation, meant that the inflation outlook appeared less concerning than was the case a few months ago.”

The Australian dollar pared gains as traders boosted bets RBA Governor Glenn Stevens will lower the overnight cash rate target from 4.75 percent, where he has held it for the past 11 months as employment growth slowed and global risks rose. The weaker outlook and declining confidence reflect a European sovereign-debt crisis and a tumble in shares that erased $10 trillion worth of equities worldwide last quarter.

“There has been a significant change at the Reserve Bank over the past couple of months,” said Brian Redican, senior economist in Sydney at Macquarie Group Ltd., Australia’s biggest investment bank. Today’s minutes provide “a lot more detail about how far they think the inflation outlook has improved so I think that adds a bit of solidity to the changing view,” he said.

Inflation Target

The central bank aims to keep inflation in a 2 percent to 3 percent range on average, and the third-quarter consumer-price index report is due on Oct. 26. Recent changes to CPI data by the statistics bureau showed underlying inflation figures were “lower than those previously published,” the minutes said.

RBA staff estimated that underlying inflation over the year to the June quarter would have been 2.25 percent to 2.5 percent, rather than 2.5 percent to 2.75 percent, the minutes showed.

The RBA noted the reweighting took account of changing spending patterns, including consumers switching their expenditure toward goods and services whose relative prices had fallen, such as computing equipment.

Another difference was the exclusion of the interest margin measure in the deposit-and-loan facilities category of CPI, “which had been a source of volatility in inflation outcomes over recent years,” it said.

Lower inflation “would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” policy makers said, also noting the exchange rate had declined from recent highs.

Currency Reaction

The Australian dollar pared gains immediately after the release of the minutes from $1.0202 before the announcement and $1.0157 yesterday in New York. It bought $1.0208 at 12:43 p.m. in Sydney, up 0.5 percent from late yesterday in New York.

“The extreme volatility observed in financial markets in August continued through September,” policy makers said in the minutes. “These concerns had been accentuated by broader worries about the global economic outlook.”

Germany said yesterday that European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion.

The RBA minutes showed officials viewed the pace of near-term economic growth as “unlikely to be as strong as earlier expected,” reflecting global and local factors.

Rate Outlook

Traders bet there is a 76 percent chance Stevens will reduce borrowing costs by 50 basis points by year end, up from 72 percent prior to release of the minutes, interbank cash-rate futures showed. The RBA has relied on the Australian dollar’s strength to temper gains in consumer prices. The local currency reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

The currency was having different effects on industries, the minutes said. “Conditions remained weak in the manufacturing, construction, wholesale and retail sectors, but stronger in the mining, transport, and recreational and personal services sectors,” the minutes said.

Underpinning the local dollar and driving Australia’s economy is demand from developing nations including China and India for iron ore, coal and natural gas. The central bank said in the minutes the value of liquefied natural gas projects announced so far in 2011 is around A$70 billion ($71.5 billion).

‘Robust Pace’

China’s economy “still appeared to be expanding at a robust pace,” the minutes said.

Gross domestic product in China grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, the government statistics bureau said today in Beijing. The gain was less than the median estimate of 9.3 percent in a Bloomberg News survey of 22 economists and follows a 9.5 percent gain in the previous three months.

Australia’s unemployment rate climbed in July and August before declining in September for the first time in six months as employers added double the workers economists forecast. The RBA’s minutes showed officials viewed the job market as “a little softer” and wage pressure easing.

A government report last week showed the number of people employed in Australia rose in September by 20,400, from a revised 10,500 fall in August. The jobless rate last month fell to 5.2 percent from 5.3 percent.

Resource-rich states led the employment gains, with Western Australia adding 7,300 jobs and Queensland 4,900 workers, while the southern state of Victoria increased employment by 3,400, the Oct. 13 report showed. New South Wales, Australia’s most populous state, led the declines with the loss of 1,300 jobs.

The RBA said today recent data showed the labor market conditions are now “ a little softer, though “the number of unemployment benefit recipients had continued to fall” in August.

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