RBA Saw Rate Appropriate, Scope to Ease, Minutes Show

RBA Says Rates Appropriate With Scope to Ease
The Reserve Bank of Australia headquarters stands in Sydney, Australia. The RBA this month lowered its forecasts for growth and inflation. Photographer: Sergio Dionisio/Bloomberg

Australia’s central bank said it has scope to ease monetary policy if needed, after keeping the benchmark interest rate unchanged this month as risks in Europe abated, minutes of its Feb. 7 meeting showed.

Policy makers “judged that if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy,” the minutes released today by the Sydney-based Reserve Bank of Australia showed. “While the financial situation in Europe remained fragile, the likelihood of an extremely bad outcome seemed to have diminished somewhat.”

Australia’s dollar fell after the minutes showed the RBA is maintaining “an easing bias,” according to Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. The central bank unexpectedly held rates at 4.25 percent this month after two quarter-percentage-point reductions late last year helped the economy weather Europe’s sovereign-debt crisis, which showed signs of easing today as debt-stricken Greece won a second bailout.

Governor Glenn Stevens and his board noted in today’s minutes that last quarter’s rate cuts “had been passed through to most lending rates in the economy, which were now around average levels.”

Since the meeting, Australia’s four biggest banks raised their standard variable mortgage rates independently from the RBA, drawing criticism from the government. The central bank said that competition for deposits, recent covered bond sales, and the cost of swapping funds raised offshore into Australian dollars had added to the price lenders paid to raise money.

‘Narrowed the Difference’

“Collectively, these developments had increased banks’ overall cost of funding relative to the cash rate and had narrowed the difference between banks’ lending rates and funding costs,” policy makers said in the minutes.

Commonwealth Bank of Australia increased the interest on a variable-rate home loan by 10 basis points to 7.41 percent last week, followed by National Australia Bank Ltd., which added 9 basis points to 7.31 percent. Westpac Banking Corp. boosted the cost by 10 basis points to 7.46 percent on Feb. 10, after Australia & New Zealand Banking Group Ltd. added 6 basis points to 7.36 percent. ANZ Bank and Westpac cited higher debt premiums and competition for deposits.

Funding costs for banks haven’t fallen as much as the 50 basis points in cuts to the central bank rate, Stevens said in Sydney today, responding to questions after a panel discussion at the ASIC Summer School 2012. Banks have responded to that fact, he said.

Aussie Falls

Australia’s currency fell 0.2 percent to $1.0735 as of 4:57 p.m. in Sydney from yesterday, when it rose 0.5 percent. The so-called Aussie trimmed declines after euro-area officials reached agreement on providing Greece with a second rescue package.

Elsewhere in the Asia-Pacific region, Hong Kong may say today its unemployment rate was unchanged at 3.3 percent in January, according to the median of 12 estimates in a Bloomberg News survey.

In Europe, Switzerland’s trade surplus probably widened in January, while a consumer confidence index may show Danish consumers became more pessimistic this month, surveys predict. Turkey’s central bank will probably keep its benchmark rate unchanged at 5.75 percent, all nine economists surveyed by Bloomberg said.

Euro-area consumer confidence was probably little changed this month with an index reading at minus 20.1 compared with minus 20.7 in January, according to a Bloomberg survey ahead of a release by the European Commission in Brussels today.

Rate Pause

The Federal Reserve Bank of Chicago’s National Activity Index probably rose to 0.22 in January from 0.17 in December, according to the median of five estimates by Bloomberg.

This month’s rate pause in Australia spurred the currency, which reached a six-month high of $1.0845 following the decision and has appreciated about 5 percent this year. The improvement in the global and domestic economies prompted investors to pare bets on a rate cut next month to 32 percent, according to a Credit Suisse Group AG index.

“With growth expected to be close to trend and inflation consistent with the target, the board considered that this setting was appropriate for the overall macroeconomic outlook,” the RBA said in today’s minutes.

Australia’s central bank aims to keep inflation between 2 percent and 3 percent on average and policy makers noted that recent data confirmed that core inflation is now in the mid-point of the target range.

On Hold

Today’s minutes suggest the central bank is “on hold for some time,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker. “Even if you’re pessimistic, it’s going to take time for that to be reflected in the data given its current momentum.”

Still, the currency’s strength is hurting Toyota Motor Corp.’s Australian division, the country’s largest car exporter, which announced last month it would cut more than a 10th of the employees at its assembly plant after a 21 percent decline in 2011 production. General Motors Co.’s local unit has also announced job cuts.

Australia recorded its worst annual jobs growth in 19 years in 2011 as Europe’s escalating debt crisis damaged confidence. The jobs market has shown signs of revival this year as employers added the most workers in 14 months in January and the unemployment rate unexpectedly declined to 5.1 percent.

Longer Hours

“Members observed that it appeared that additional demand for labor had been met largely through existing employees working longer hours over the past year, rather than through an increase in hiring,” the minutes showed.

Australia’s economy is being driven by China, the nation’s biggest trading partner, which is buying up iron ore, coal and natural gas as millions of people in the world’s most populous nation move to urban centers. Resource projects in Australia valued at A$456 billion ($490 billion) are spurring companies such as BHP Billiton Ltd. to increase hiring and helping cushion a slump in manufacturing and services.

“Growth in China had moderated as intended, but on most indicators had remained quite robust through the second half of 2011,” policy makers said in the minutes.

The RBA this month lowered its forecasts for growth and inflation. It sees average growth of 3.5 percent in 2012, down from its Nov. 4 estimate of 4 percent. Consumer prices will rise 3 percent in the year through to the fourth quarter, less than a previous prediction of 3.25 percent, the central bank said, while underlying inflation is predicted to be unchanged at 2.75 percent.

“Global economic and financial market developments had been somewhat more positive over the past month or so,” policy makers said in today’s minutes. “Whereas the situation had been looking quite negative in early December, recent actions by the European Central Bank and euro-area governments had boosted confidence.”

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