Australia Sparks Currency Gain by Holding Key Rate: Economy
Australia’s central bank kept its benchmark interest rate unchanged at a developed-world high as the global economy stabilizes and domestic inflation picks up, driving the local currency to a five-week high.
Governor Glenn Stevens and his board left the overnight cash-rate target at 3.25 percent, the Reserve Bank of Australia said in a statement today in Sydney. The move surprised most economists, with 20 of 27 surveyed by Bloomberg News having predicted a cut to 3 percent. Traders were split 50-50 on whether Stevens would stand pat or cut.
“With prices data slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being,” Stevens said in the statement.
His decision to hold reflects Australia’s standing as one of the few industrial economies that needs to remain alert to inflation risks. The nation’s trade-driven economy is reliant on Chinese resource demand for growth and its currency remains above parity with the U.S. dollar even as America’s expansion accelerates.
“Unless global conditions take a sharp turn for the worse, the RBA is unlikely to act,” said Daniel Martin, an economist at Capital Economics Ltd. in Singapore. “We think the RBA will now keep its cash rate on hold until late-2013 to help counteract lackluster global demand and boost non-mining sectors ahead of a peak in mining investment.”
The Australian currency jumped to $1.0438 after the decision, the highest level since Sept. 28.
A quarter of Australia’s exports, or about 5 percent of gross domestic product, goes to China, and 60 percent of those shipments are iron ore. Data this month showed China’s non- manufacturing industries rebounded from the slowest expansion in at least 19 months, indicating the world’s second-biggest economy is recovering from a seven-quarter slowdown.
The Australian government has pressed the central bank to loosen monetary policy as it bids for a A$44 billion ($46 billion) swing in the budget back to the black in time for an election late next year. Policy makers cut rates by 1.5 percentage points since October last year in five separate moves.
The currency’s 57 percent climb in the past four years has contributed to the loss of 37,000 manufacturing jobs in the past two years and 70,000 in construction in the past 12 months. The drop had been absorbed by the nation’s booming resource industries as companies invest in natural gas, iron ore and coal output to meet demand in Asia.
The fallout from the measures has included surging currencies in export-driven economies from Scandinavia to South Korea to Australia. The so-called Aussie has risen 1.6 percent since the RBA’s Oct. 2 meeting, when it lowered rates by a quarter percentage point, and is trading higher than when the central bank began its easing cycle in November last year.
“Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns,” Stevens said. “While the impact of these changes takes some time to work through the economy, there are signs of easier conditions starting to have some of the expected effects.”
An Australian government report Oct. 24 showed annual core inflation accelerated last quarter to the mid-point of the central bank’s 2 percent to 3 percent target range. Retail sales and building approvals for September jumped more than economists projected, according to Bureau of Statistics reports released in the past week.
The economy grew about 4 percent in the first half of 2012 from a year earlier on the strength of resource-industry investment and consumer spending. Signs of a slowdown from that pace are reflected in the unemployment rate jumping to a 2 1/2- year high of 5.4 percent in September.
“With the labor market having generally softened somewhat in recent months, and unemployment edging higher, conditions should work to contain pressure on labor costs in sectors other than those directly affected by the current strength in resources,” Stevens said today.
Asian stocks gained, with the MSCI Asia Pacific Index rising 0.2 percent at 3:02 p.m. in Tokyo.
Later today, the U.K. may say manufacturing production extended an eight-month decline in September, while German factory orders probably fell for a ninth month in the same period, Bloomberg surveys of economists showed. The European Union’s statistics office is forecast to report producer-price inflation slowed in September.
On the day of the U.S. presidential elections, the Labor Department may say job openings in the U.S. rose in September for the first time in three months.
Still, the weakening of commodity prices last quarter and the elevated currency prompted mining companies including BHP Billiton Ltd. (BHP) and Fortescue Metals Group Ltd. (FMG) to put off projects and cut jobs.
The RBA reiterated its view that the exchange rate “remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook.”
Commodity prices fell 2.2 percent in October from the previous month in Australian dollar terms, an RBA gauge showed last week. The index has slumped 19 percent over the past year, it showed.
“Key commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past couple of months, with some prices recovering some ground while others declined further,” Stevens said in today’s statement.
Prices of the nation’s key export, iron ore, have rebounded almost 40 percent since reaching a three-year low on Sept. 5 after China announced spending on new subways and roads. The U.S. job market improved as unemployment held below 8 percent for a second month in October.
Today’s decision was the first since Stevens took the helm in 2006 that the RBA hasn’t cut or raised rates at its November meeting, held on same the day as the Melbourne Cup, the nation’s richest horse race.
Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia who predicted today’s rate pause, said an RBA cut may still be in the offing.
“The statement still raises enough issues that officials seem anxious about, including the global outlook, the local labor market and the persistent strength of the Australian dollar relative to lower commodity prices,” Walters said. “This points to probable further policy easing in the period ahead.”
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