Bernanke Parting Gift on Aussie Lets RBA Hold: Australia Credit

Ben S. Bernanke’s decision to begin withdrawing unprecedented policy stimulus is gifting Australian counterpart Glenn Stevens the looser conditions he wants without lowering interest rates at a time of accelerating inflation.

The Aussie has slumped 7.1 percent in the past three months, the most among Group of 10 currencies. A 10 percent drop boosts gross domestic product by 0.5 percentage point to 1 percentage point over two years, the Reserve Bank of Australia estimates. All 32 economists surveyed by Bloomberg expect the RBA to keep the cash rate unchanged at 2.5 percent tomorrow.

Stevens is seeking to balance slowing growth and rising unemployment as a once-in-a-century mining investment boom wanes against surging Sydney house prices. Having cut rates by 2.25 percentage points since late 2011 to a record, in recent months he’s switched to talking the currency down, an effort boosted by the Federal Reserve’s decision to begin tapering bond purchases.

“The Fed delivered Glenn Stevens a great Christmas present in the form of tapering and a lower Aussie dollar,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former RBA economist. “Inflation is picking up more than the RBA expected and I suspect the aggressive campaign to jawbone the Aussie dollar lower that we saw in the tail end of last year might have come to its end.”

Preferred Level

Stevens said in an interview, speeches and statements in the final months of last year that the currency needed to weaken to help rebalance the economy. In December, he said a level near 85 U.S. cents would be about right. It was at 87.66 U.S. cents at 12:35 p.m. in Sydney.

The Fed has cut to $65 billion from $85 billion its monthly bond buying, trimming a program that flooded markets with cash and helped devalue the U.S. currency.

The currency “is close to the level consistent with its medium-term determinants,” the RBA said in a December briefing document released Jan. 28 under a Freedom of Information request from Bloomberg. “Even though the strength of the A$ can be largely explained by the model, it may still be considered to be ‘overvalued’ to the extent that it is judged to be too high to achieve desired domestic economic outcomes.”

While the currency is heading in the right direction for the central bank, cheap mortgages and home buying by locally resident and mainland Chinese are inflating housing bubbles in and around Sydney. Prices in some suburbs of Australia’s biggest city have surged as much as 27 percent in the past year, almost three times faster than the overall market.

Price Gains

A private RP Data-Rismark home value index released today showed house and apartment prices rose 9.8 percent in major cities in the year to Jan. 31. Government data today showed building approvals fell 2.9 percent in December, the biggest drop since June.

The central bank is trying to stimulate housing construction to pick up some of the slack in the labor market from waning mining investment, and says that higher property prices are needed to spur the building industry. It says it is monitoring prices and the labor market.

Australian employers unexpectedly cut jobs in December by 22,600, capping the worst year of full-time losses since 1992. Unemployment held at a four-year high of 5.8 percent as the participation rate fell to the lowest in almost eight years, government data showed Jan. 16. A private Australia & New Zealand Banking Group Ltd. survey showed job advertisements slipped 0.3 percent in January.

Faster Inflation

Inflation unexpectedly accelerated in the final three months of last year to above the midpoint of the RBA’s 2 percent to 3 percent target range. Part of the increase reflected the currency’s drop that boosted import prices, and part was due to resurgent local costs.

“The Aussie decline has done some of the RBA’s work for it,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “When you look at the way the currency has headed and the recent inflation data, I think the most likely course is for the RBA to be on hold for the foreseeable future.”

Traders are pricing in just a 5 percent chance the RBA will cut rates tomorrow by a quarter point to 2.25 percent and see a 30 percent chance of a reduction in July, according to swaps data compiled by Bloomberg News.

Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne, predicts unemployment will rise to 6.5 percent by the end of the year -- a 12-year high.

“The actual unemployment rate is significantly worse than official figures suggest,” Eslake wrote in a research report last week, referring to the decline in participation. “The RBA may be getting behind the curve on labor market weakness.”

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