UBS Says RBA Rate Rise in ’14 Too Early as Mining Boom Fades

The Reserve Bank of Australia probably will hold its benchmark rate at a record low this year to smooth the economy’s transition from mining-led growth, UBS Global Asset Management says.

Planned cuts to government spending at a time when capital investment in resources is fading will delay policy tightening for now, said Anne Anderson, who helps oversee almost $30 billion as the Sydney-based head of Asia-Pacific fixed income at UBS AG’s money-management business. She is favoring the bonds of state governments on prospects regional authorities will trim borrowings.

“The market may from time to time flirt with the idea that the next move is up, and maybe as soon as the end of the year,” Anderson said in a phone interview yesterday. “I think that’s too early.”

Traders are starting to price in expectations the central bank will raise interest rates within a year after RBA Governor Glenn Stevens left borrowing costs at 2.5 percent this week and said a period of rate stability would be “the most prudent course.” Australia unexpectedly generated a trade surplus in December as annual exports to China rose to a record, a report yesterday showed, while data last month indicated a surprise decline in payrolls, signaling an uneven economic recovery.

Rates Speculation

A Credit Suisse Group AG index shows traders see policy makers adding 18 basis points to the cash rate in the next 12 months, and the implied yield on December cash-rate futures stands at 2.60 percent. The median forecast of 29 economists surveyed by Bloomberg News this month is for the RBA to raise its benchmark to 2.75 percent in the first quarter of 2015.

“Over the past few months, there have been further signs that very stimulatory monetary policy is working to support economic activity,” the RBA said today in its quarterly monetary policy statement, raising its forecasts for both growth and inflation. “The board’s view is that a period of stability in the policy rate is likely.”

Australian gross domestic product will rise 2.75 percent in the year to June and 2.25 percent to 3.25 through December, “primarily owing to the lower exchange rate, which is expected to boost exports and restrain imports,” the RBA said. Those forecasts are up from November’s estimates of 2.5 percent growth in the year to June and 2 percent to 3 percent for the 12 months to December 2014.

Housing Pickup

Ausbil Dexia Ltd. was among the companies seeing an earlier increase in official borrowing costs, predicting the RBA’s cash target will be at 3 percent by Dec. 31.

“The housing market is doing well,” John Honan, the Sydney-based chief economist at Ausbil Dexia, said in a Bloomberg Television interview yesterday. “The risks to our underlying inflation story are more heightened now, so I think the Reserve Bank is on watch and the next move will be up in rates.”

Australian homebuyers are borrowing at the fastest pace in four years amid record prices, with the value of new mortgage approvals jumping 25 percent in November from a year earlier, data last month showed. Average dwelling values in the biggest cities climbed 9.8 percent in 2013 to a record A$614,367 ($549,490), according to the RP Data-Rismark home value index.

“Dwelling investment is expected to grow quite strongly over the forecast period,” the RBA said today. “Building approvals have increased sharply in recent months and other forward-looking indicators, such as loan approvals and first home owner grants for new construction, remain at relatively high levels.”

Inflation Outlook

The trimmed mean measure of core consumer prices rose 2.6 percent in the final three months of 2013 from a year earlier, the statistics bureau said on Jan. 22, above the middle of the central bank’s 2 percent to 3 percent target range.

The RBA’s monetary policy statement expressed uncertainty over what drove the price pickup last quarter and said it expects inflation to be consistent with its target over the forecast period. It projected core inflation of 3 percent in the year ended June, half a point higher than seen three months earlier, and 2.25 percent to 3.25 percent through December 2014, a quarter-point increase.

“Ultimately, the RBA would be looking to tighten rates, it’s just a matter of when,” said UBS’s Anderson, who says the central bank may raise its benchmark in the first half of 2015.

Market Reaction

The Australian dollar surged and sovereign debt dropped after the RBA decision, with the three-year yield increasing from a four-month low of 2.78 percent touched before the Feb. 4 announcement. It climbed to 3 percent as of 4:45 p.m. in Sydney, up 16 basis points this week. The benchmark 10-year yield has climbed 15 basis points since Jan. 31 to 4.15 percent.

The Aussie was at 89.44 U.S. cents, poised for a 2.1 percent gain, the strongest weekly advance since October.

Australian federal securities returned 0.8 percent this year, as have notes by the nation’s six states and two territories, Bank of America Merrill Lynch indexes show.

The extra yield investors demand to hold so-called semi-government bonds instead of their sovereign counterparts was 41 basis points yesterday, after narrowing to a 2 1/2-year low of 38 basis points in December, according to Bank of America data.

“Semis should continue to do well,” Anderson said. “Semis are more advanced in their borrowing and there is a relative scarcity relative to Commonwealth securities, therefore that supports the narrowing trade.”

Queensland, Australia’s biggest state issuer, has A$77.9 billion of notes outstanding, data compiled by Bloomberg show. The state reduced its borrowing requirements for the year ending June 30 to A$11.1 billion from A$12.1 billion previously, the government said in a Dec. 19 statement.

The federal government, which has A$297 billion in debt outstanding, said on Dec. 18 its net issuance for the current fiscal year will be A$52 billion from an estimated A$47 billion in October.

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