Bloomberg News

RBA Extends Rate Pause as Currency Hurts Factories, Stores

June 07, 2011

(Updates with currency in seventh paragraph, home-loan approvals in second-to-last paragraph.)

June 8 (Bloomberg) -- The Reserve Bank of Australia’s decision to extend a pause in interest-rate increases signals concern that a rising currency and the developed world’s highest borrowing costs are restraining growth.

Governor Glenn Stevens held the overnight cash rate target at 4.75 percent yesterday and acknowledged the subdued outlook for industries other than mining and energy. “Outside the resources sector, investment intentions have been revised lower recently,” he said in a statement in Sydney.

The comments may reflect worries of three representatives of the RBA’s nine-member board who have ties to Woolworths Ltd., Australia’s biggest retailer, Fairfax Media Ltd., its second- largest newspaper publisher, and BlueScope Steel Ltd., the nation’s largest steelmaker. Retailers and factories are getting pummeled by about a 30 percent gain in the currency in the past year that cuts export income while higher borrowing costs are discouraging spending.

“The RBA board has those dovish members and they are now worried about the two-speed economy,” said Roland Randall, an economist at TD Securities Inc. in Singapore. “There seems to be a divergence between the position of the board, which is reflected in the statement, and last month’s statement on monetary policy, which reflects the view of the staff.”

In a quarterly policy statement on May 6, the RBA said rates will need to rise “at some point” to contain inflation. That phrase wasn’t in yesterday’s statement.

Rate Guidance

While the decision to hold was forecast by investors and 23 of 28 economists surveyed by Bloomberg News, they had expected guidance on when the next rate increase was likely to take place.

The Australian dollar reversed gains and investors cut bets the RBA will raise rates in the third quarter after the decision. The currency traded at $1.0655 as of 12:23 p.m. today in Sydney from $1.0744 before yesterday’s announcement.

Traders see a 10 percent chance Stevens will increase borrowing costs in July, down from 38 percent before yesterday’s announcement, and a 30 percent chance in August, a decline from 60 percent.

“The RBA seems to have stepped back from the warnings issued in the monetary policy statement and now appears to be comfortable with the inflation outlook for the next 12 months,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney.

Low Unemployment

Stevens said yesterday’s decision reflects “softened” prices for raw materials and an unemployment rate that’s been little changed near 5 percent. Consumer prices that were boosted by natural disasters earlier this year aren’t expected to accelerate much above the RBA’s inflation target range of 2 percent to 3 percent, he said.

“The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring,” Stevens said in the statement. “The bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months.”

The central bank has relied on the Australian dollar’s strength to tighten monetary conditions. The local currency reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983.

‘Continued Restraint’

“The exchange rate remains, in real effective terms, close to its highest level in several decades,” Stevens said. “If sustained, this could be expected to exert continued restraint on the traded sector.”

The RBA has expressed concern that higher consumption will clash with capacity constraints such as skill shortages caused by mining and energy investment that the government estimates will reach A$76 billion ($81 billion) next fiscal year.

Stevens has sought to restrain household spending, which accounts for 55 percent of Australia’s economy, with 175 basis points of rate increases from October 2009 to November, letting the resources boom drive growth.

The RBA’s board has five representatives from industry, including Jillian Broadbent, a director at Woolworths; Roger Corbett, chairman of Fairfax; Graham Kraehe, chairman of BlueScope Steel; John Akehurst, a director at Origin Energy Ltd., ConocoPhillips’ partner in an $18.5 billion liquefied natural gas project in Australia; and Catherine Tanna, executive vice president at BG Group Plc, the U.K.’s third-biggest gas producer.

Non-Industry Members

The board’s other members are Stevens, Deputy Governor Ric Battellino, Secretary to the Treasury Martin Parkinson, and Warwick McKibbin, an economics professor at Australian National University.

The nation’s economy shrank 1.2 percent in the first quarter, the most since 1991, as floods in the northeast slashed coal exports, a June 1 report showed. Even so, bonds fell the most in almost four months after the data as investors focused on final demand, the broadest measure of spending by government, consumers and businesses, which more than doubled to 1.3 percent.

Stevens has held rates in part to allow the economy in Queensland state to recover from January floods that Prime Minister Julia Gillard called the nation’s most expensive natural disaster.

In yesterday’s statement, Stevens said the GDP report showed a “solid increase in aggregate demand.”

A government report today showed home-loan approvals rose in April by the most since March 2009, the first increase in financings this year.

Stevens also said yesterday that “uncertainty over the prospects for resolution of the banking and sovereign debt problems in Europe has increased over the past couple of months, which has been adding to financial market volatility.”

--With assistance from Daniel Petrie and Shani Raja in Sydney. Editor: Brendan Murray

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


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