RBA Keeps Key Rate at 4.75% as Rising Currency Eases Prices
April 05, 2011, 2:04 AM EDTBy Michael Heath
(Updates with today’s report on trade deficit in 10th and 11th paragraphs.)
April 5 (Bloomberg) -- Australia’s central bank left its benchmark interest rate at the highest level in the developed world as floods disrupt coal mining in the nation’s northeast and a rising currency tempers inflation.
Reserve Bank of Australia Governor Glenn Stevens held the overnight cash rate target at 4.75 percent for a fourth straight meeting, as forecast by all 25 economists surveyed by Bloomberg News. He called the level “mildly restrictive” and appropriate given the economy’s outlook.
“The natural disasters over the summer have reduced output and the resumption of coal production in flooded mines is taking longer than initially expected,” Stevens said in a statement announcing the decision. “Commodity prices, including oil prices, have risen over recent months, pushing up measures of consumer price inflation in many countries.”
Australia’s dollar climbed to a record this week as surging mining investment reduces the economy’s spare capacity. The outlook for global growth is clouded by a nuclear crisis in Japan, Australia’s second-largest trading partner, and tensions in the Middle East that sent oil prices higher.
‘Tumultuous Month’
“Despite a tumultuous month, the central bank is trying to keep focused on the medium-term story,” said Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney. “The RBA is obviously not in a hurry to come back to the table given they’re ahead of the curve on inflation and have time on their side.”
The Australian dollar was little changed after the decision, trading at $1.0323 at 3:15 p.m. in Sydney from $1.0327 before the announcement.
Employment growth “has moderated,” inflation is consistent with the central bank’s goal and the currency’s strength is helping ease prices pressures, he said. The impact of Japan’s crisis on Asia’s economy is “expected to be limited,” Stevens said.
Traders see a 72 percent chance he will keep rates on hold for the rest of the year, bank bill futures show.
The Reserve Bank, which raised rates seven times from October 2009 to November last year, is pausing as the country recovers from flooding and cyclones in Queensland state. Australia’s economy accelerated 0.7 percent in the fourth quarter, from a revised 0.1 percent three months earlier.
Trade Deficit
The nation’s trade balance unexpectedly swung to a deficit in February for the first time in almost a year as the natural disasters cut mining shipments and higher fuel prices boosted imports, a government report showed today.
The shortfall was A$205 million ($212 million), from a revised A$1.43 billion surplus in January, the first time imports exceeded exports since March 2010.
The deficit ended a 10-month run of trade surpluses, the longest stretch since 1972-73, Westpac Banking Corp. economists led by Bill Evans said. The “much weaker than expected” trade figures mean the economy may have contracted 0.2 percent in the first quarter, according to Westpac.
Tropical Cyclone Yasi in February tore through sugar- and banana-producing areas, following two months of flooding in Queensland that killed 36 people, shut mines and wiped out crops. The state produces 80 percent of the coking coal exports from Australia and grows more than 30 percent of the nation’s fruit and vegetables.
Swan’s Estimate
Treasurer Wayne Swan said this week the disasters will likely cost the economy about A$9 billion after the government raised estimates on losses to the coal industry by 20 percent.
Australia is undergoing its biggest mining investment expansion since the 19th century to meet rising demand for the nation’s iron ore and coal from China and India. That helped propel the Australian dollar to $1.0417 this week, the highest level since the currency was freely floated in 1983.
The Australian currency’s strength has helped slow parts of the economy and given Stevens leeway to delay rate increases. A report last week showed Australian manufacturing contracted in March for the sixth time in seven months as the stronger dollar made exports more expensive.
Increased demand for skilled workers at projects such as Chevron Corp.’s A$43 billion Gorgon liquefied natural-gas project, under construction in Western Australia, threatens to stoke wage growth and inflation.
Job Market
Australia’s labor market, which had record job creation last year, has gone through its worst three-month period since mid-2009. The economy has lost a net 2,300 jobs from December through February after gaining 362,800 during the first 11 months of 2010, according to statistics bureau figures.
Australian employers probably added 24,000 jobs in March and the unemployment rate held at 5 percent for a third straight month, according to the median estimate in a Bloomberg News survey of 25 economists before an April 7 report.
Commodity exports from Australia, the largest shipper of coal, iron ore and wool, may gain 14 percent to a record next financial year, driven by rising prices, the federal government’s forecaster said last month.
Stevens is relying on lower household spending and higher savings to slow price gains and give him scope to delay rate increases. Government reports last week showed Australian retail sales rose faster than economists expected in February and lending to businesses climbed for the first time in nine months.
--With assistance from Daniel Petrie in Sydney. Editor: Brendan Murray, Cherian Thomas
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
