Australia Weathering European Debt Crisis Recalls 2009 Resilience: Economy
Australia’s central bank said resource investment is helping the economy ride out Europe’s sovereign-debt crisis, sending the local currency higher as traders reduced bets on the scale of future interest-rate cuts.
The Reserve Bank of Australia lowered borrowing costs Dec. 6 because of the “non-trivial possibility of a very sharp contraction” in Europe, according to minutes of the meeting released today. Policy makers had seen no “strong need” to reduce rates based on the domestic outlook, they showed.
The Australian dollar advanced as the central bank said “solid growth” among trading partners is supporting an expansion in the only Group of 10 nation to avoid the 2009 worldwide recession. Companies including BHP Billiton Ltd. (BHP) are developing resource projects to meet demand for iron ore, coal and gas from China, the world’s second-biggest economy and Australia’s biggest export market.
“The December cut was the RBA’s insurance policy,” said Paul Brennan, a senior economist at Citigroup Inc. in Sydney. “The minutes show that the decision to cut interest rates was not taken lightly. Instead, there appears to have been some deliberation about the need to cut rates at all.”
Traders pared bets on the chances of a 50 basis-point reduction at the next meeting in February to 36 percent after the release of the minutes, from 42 percent yesterday, interbank cash-rate futures showed. Australia’s three-year government bond yield rose 2 basis points to 3.01 percent as of 2 p.m. in Sydney.
The Australian dollar gained 0.4 percent to 99.34 U.S. cents as of 4:17 p.m. in Sydney after dropping 0.9 percent yesterday. The currency rose 0.3 percent to 77.47 yen.
Asian stocks rebounded from a three-week low as South Korean shares pared yesterday’s losses stemming from the reported death of North Korean leader Kim Jong Il. The MSCI Asia Pacific Index added 0.3 percent at 6:24 p.m. in Tokyo and Standard & Poor’s 500 Index futures gained 0.8 percent.
Other reports in the Asia-Pacific region today showed exports in Thailand fell 12.4 percent in November and Taiwan’s overseas orders gained 2.54 percent from a year earlier, reflecting a weakening in demand.
In the U.S., a Commerce Department report may show housing starts last month rose to a 635,000 annual rate, a separate survey showed.
RBA Governor Glenn Stevens and his board reduced rates by a quarter percentage point on Nov. 1 and again this month to 4.25 percent.
A day after the December policy meeting, a government report showed Australia’s economy grew faster than estimated last quarter on consumer spending and mining-driven investment. Gross domestic product rose 1 percent in the three months ended Sept. 30, after growing a revised 1.4 percent the prior quarter, the fastest pace in four years, a Bureau of Statistics showed.
Resource projects in Australia valued at A$456 billion ($453 billion), fueled by companies such as BHP Billiton, have cushioned a slump in manufacturing and services hit by a record currency and subdued consumer spending. The Aussie reached $1.1081 on July 27, the most since it was freely floated in 1983.
Policy makers said the case this month for lowering borrowing costs revolved around the “downside risks” posed by Europe to the global economy, the minutes showed. “The risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict,” according to the record.
Australia is headed for its worst annual jobs growth in 15 years and the unemployment rate advanced last month to 5.3 percent, matching the highest level this year.
“Liaison had indicated significant caution in hiring intentions, with firms waiting for evidence of growth in demand before looking to increase staff levels,” policy makers said in the minutes, referring to the domestic economy. Most companies “expected wage pressures to remain contained,” they said.
Europe’s fiscal turmoil is cutting demand in China’s biggest export market, and a Chinese government campaign to rein in property prices is threatening home sales and construction. China’s economic growth cooled to 9.1 percent last quarter, the least in more than two years, and an increase in exports in November was the weakest since 2009 excluding seasonal distortions.
“The poor outcomes in Europe were weighing on Asian exports, and growth in domestic demand had moderated somewhat,” the minutes said.
Europe’s troubles have weighed on the so-called Aussie dollar in recent weeks. The world’s fifth most-traded currency has fallen about 10 percent since its July peak on concern Greece would default and trigger a repeat of the credit freeze that followed the 2008 collapse of Lehman Brothers Holdings Inc.
In the minutes, the RBA noted “no signs of strain in local money markets through November and banks had also been able to access short-term offshore markets with relative ease.”
Payrolls in Australia gained 44,700 through the first 11 months of this year, heading for the smallest annual growth since 1996 after a record 362,300 increase in 2010, government data showed this month. The report contrasted with figures showing the biggest six-month gain in economic growth since March 2007.
“Given the expectation that inflation would be consistent with the target over the next couple of years, members felt that there was scope for a modest reduction in the cash rate,” the minutes showed. The central bank aims to keep domestic inflation in a range of 2 percent to 3 percent.
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