RBA Holds Key Rate at 3.5% as Prior Cuts Buoy Growth: Economy

Australia Holds Key Rate at 3.5% as Prior Cuts Buoy Economy
The sustained strength of the Australian dollar has helped douse consumer prices. Photographer: Brendon Thorne/Bloomberg

Australia’s central bank kept interest rates unchanged at a 2 1/2-year low, saying its recent reductions in borrowing costs will help the economy weather a more subdued global outlook.

Governor Glenn Stevens and his board left the overnight cash-rate target at 3.5 percent, the Reserve Bank of Australia said in a statement in Sydney today. The decision was predicted by all 28 economists surveyed by Bloomberg News.

“There has been a material easing in monetary policy over the past six months,” Stevens said. “The board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.”

Australia recorded its best January-to-May period of hiring in five years and a A$500 billion ($513 billion) investment pipeline is driving growth in some regions, even as export prices have slumped. Stevens, who cut rates by a total of 75 basis points in May and June, held after European Union leaders agreed last week on measures to help Italy and Spain reduce the cost of servicing debt.

“The global outlook continues to dominate a lot of their discussion,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. For the RBA to cut rates in August, “you’ll need to see further weakening in global activity indicators -- and you have had that over the last month -- but probably more importantly some renewed stress in global credit markets,” she said.

Currency Pares Gains

The local currency pared gains, trading at $1.0260 at 3:29 p.m. in Sydney from $1.0278 before the decision was announced.

“The exchange rate has been volatile recently, but overall remains high,” Stevens said today.

Two days after Stevens eased last month, the central bank in China, Australia’s largest trading partner, reduced rates for the first time since 2008 as Europe’s turmoil threatened to disrupt the global economy.

China may introduce “more proactive” policies to support growth by stabilizing foreign trade and expanding infrastructure investment, the China Securities Journal reported June 27.

Even after last month’s rate cut, Australia has the highest borrowing costs among major developed nations as Stevens seeks to manage an economy powered by the biggest resource boom since prospectors in New South Wales set off a gold rush in the 1850s.

Mining Boom

The latest bonanza -- for iron ore, coal and natural gas -- is bringing investment projects and helped keep the unemployment rate at 5.1 percent in May. That’s lower than 8.2 percent in the U.S. and 11.1 percent in the euro area.

Elsewhere in the Asia-Pacific region today, China’s non-manufacturing industries expanded at a faster pace in June as the property market and new orders picked up, according to the National Bureau of Statistics and China Federation of Logistics and Purchasing.

The MSCI Asia Pacific Index advanced for a fifth straight trading day in Tokyo, reaching 118.79, the highest in about seven weeks.

Singapore’s purchasing managers’ index may show a slower pace of growth for the manufacturing industry last month, economists said in a Bloomberg survey.

In Europe, Spain may say registered unemployment fell for a third month in June, according to a Bloomberg survey. Construction in the U.K. probably expanded at a slower pace last month, while the European Union’s statistics office is forecast to say euro-area producer-price inflation slowed in May, surveys showed.

U.S. Factories

A U.S. Commerce Department report is forecast by economists to show factory orders rose for the first time in three months in May.

Australia’s mining boom, rate differentials and the opportunity to bet on Chinese growth has driven a 45 percent appreciation in Australia’s currency since Jan. 1, 2009. The so-called Aussie advanced 5.2 percent in June, the biggest monthly increase since October.

The sustained strength of the local dollar has helped douse consumer prices. A private gauge of Australian inflation released this week dropped in June on weaker fuel and furniture prices, signaling little cost pressure on consumers in the second quarter.

Stevens today said the central bank’s inflation outlook hasn’t changed, even with the July 1 introduction of a tax on pollution emissions that will boost prices. “Maintaining low inflation over the longer term will, however, require growth in domestic costs to slow as the effects of the earlier exchange rate appreciation wane,” he said.

Job Growth

Australia unexpectedly added 38,900 workers in May, and annual economic growth of 4.3 percent in the first quarter was the fastest pace since 2007, government reports showed since the RBA’s June 5 meeting.

“Interest rates for borrowers have declined, to be a little below their medium-term averages,” Stevens said today. “Business credit has increased more strongly in recent months, though credit growth remains modest overall.”

Earlier today, the Australian Bureau of Statistics said building approvals in May jumped 27.3 percent from the previous month, the biggest monthly gain on record.

Stevens said today the housing market “remains subdued.”

Other data in the past month showed Australia posted monthly trade deficits from January through April, consumer confidence near the lowest level of the year and a manufacturing industry in a fourth month of contraction.

The RBA has cut the cash rate four times in the past eight months -- by 25 basis points at successive meetings in November and December, by 50 points on May 1 and by another 25 points last month.

European Union leaders ushered in the strongest rally in the single currency and in Spanish bonds this year after agreeing at their June 28-29 summit to loosen bailout rules, lay the foundations for a banking union and break the link between sovereign and banking debt through the direct recapitalization of lenders.

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