RBA’s Stevens Says Policy Right, Growth Seen at Trend

RBA Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

Australia’s benchmark interest rate is “about right for the moment” as economic growth is close to trend as concerns ease that Europe’s debt crisis will disrupt global output, Reserve Bank Governor Glenn Stevens said.

“We do not, at this point, see the signs of the rapid collapse in global demand we saw three years ago,” Stevens said today in prepared testimony in Sydney to the House of Representatives Standing Committee on Economics.

Stevens and his board unexpectedly kept the nation’s benchmark interest rate unchanged at 4.25 percent on Feb. 7 after making a quarter percentage-point cut Nov. 1 and another on Dec. 6. Three of 27 economists in a Bloomberg News survey predicted he’d pause this month, while the other 24 forecast a reduction to 4 percent.

Australia has the highest benchmark borrowing costs among major developed nations. Policy rates in Japan and the U.S. are near zero, the European Central Bank has its benchmark at 1 percent, and New Zealand’s is a record-low 2.5 percent.

“The Governor’s opening statement suggests that the RBA has a ‘goldilocks’ outlook for the Australian economy over the next few years,” said James McIntyre, senior economist for global markets research at Commonwealth Bank of Australia in Sydney. “Growth and inflation not too hot, but not too cold either.”

European finance ministers approved a 130 billion-euro ($174 billion) bailout package for Greece this week by tapping into European Central Bank profits and convincing investors to provide more debt relief to the Mediterranean country. The deal includes a 53.5 percent writedown for investors in Greek debt.

Currency Gains

Australia’s relatively high benchmark rate and a mining-investment pipeline have helped elevate its currency, making the so-called Aussie the second-biggest gainer in the past 12 months among Group of 10 currencies tracked by Bloomberg. The currency has strengthened 6.6 percent against the U.S. dollar in the past year to $1.0749 as of 12:22 p.m. in Sydney, after touching $1.1081 in July, the highest since it was freely floated in 1983.

“If we want to describe the stance of monetary as broadly neutral, that’s probably a reasonable description, and the fiscal side I think is, as far as I know, unfolding more or less as it was planned,” Stevens said in response to questions.

Multi-Speed Economy

The currency’s gains have hurt earnings for manufacturers, tourism and retailers, helping create what the RBA has referred to as a multi-speed economy with those industries lagging behind the performance of companies linked to the mining boom.

Regarding the currency, “the most recent bout of strength is happening at a time when the terms of trade have actually peaked and started to come down,” Stevens said in response to questions after the testimony. “That is a bit odd, but we’ll see what happens. We haven’t done any intervention to try to hold the Australian dollar down. I’m not saying we never would, we have been known to intervene on both sides, but we certainly don’t foreshadow it.”

The unemployment rate may rise to 5.5 percent in the coming year, after it fell last month to 5.1 percent, RBA Deputy Governor Philip Lowe said in a response to questions.

“The RBA continues to exude a relaxed nature, which we think precludes near-term easing, barring renewed sharp deterioration offshore,” said Michael Turner, an economist in Sydney for Royal Bank of Canada. The RBA will lower rates to 3.75 percent by year-end as “we continue to expect a higher unemployment rate through the year, which should provide further easing of wage pressures,” Turner wrote in a note to clients.

Australia experienced the weakest jobs market in 20 years during 2011, according to government data.

Mortgage Rates

The country’s four biggest lenders -- Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd. -- responded to this month’s interest-rate pause by raising some of their mortgage rates, citing higher funding costs.

Treasurer Wayne Swan condemned the banks, urging customers to shop around for better rates.

Stevens said the banks’ decisions were understandable considering increases in wholesale funding costs, adding that the increases in mortgage rates wouldn’t weaken the RBA’s policy tools.

“The shifting relationship between the cash rate and other rates in the economy is a factor the Board takes into consideration in setting the cash rate,” Stevens said. “Recent developments do not materially affect the capacity of monetary policy to achieve its goals.”

Lowered Forecasts

The central bank earlier this month lowered its forecast for domestic growth and inflation this year.

The RBA 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, it said.

“Our most recent assessment was that, with growth near trend, inflation consistent with the target, interest rates about average and an outlook suggesting more of the same, the setting of policy was about right for the moment,” Stevens said in his testimony.

Bolstering the case for faster growth was a Feb. 16 report that showed Australia added the most workers in 14 months in January and the unemployment rate unexpectedly declined.

Payrolls rose by 46,300 last month, the most since November 2010, after a revised drop in December of 35,600, the statistics bureau said. That was more than four times the median estimate for an increase of 10,000 in a Bloomberg News survey of 25 economists. The jobless rate fell to 5.1 percent from 5.2 percent.

Improved Outlook

Australia’s economy allows for “a pretty good policy setting from the central bank’s perspective and the global outlook has improved a fair bit just over the last month or two,” said Shane Lee, a senior interest-rate strategist in Sydney at ANZ Bank. “The way things are traveling at the moment, there is a risk that rates are on hold for the bigger part of this year.”

ANZ forecasts the central bank will cut rates in May and hold them for the rest of the year, Lee said.

The RBA will trim borrowing costs by 0.44 percentage point in the coming 12 months, according to a Credit Suisse Group AG index based on swaps trading.

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