Bloomberg News

RBA’s Stevens Holds Key Rate, Signals Little Urgency to Increase

June 07, 2011

June 7 (Bloomberg) -- The Reserve Bank of Australia left its benchmark interest rate unchanged for a sixth straight meeting and signaled little urgency to increase borrowing costs as a stronger currency helps contain inflation.

Central bank Governor Glenn Stevens today held the overnight cash rate target at 4.75 percent in Sydney, as forecast by 23 of 28 economists surveyed by Bloomberg News. In a statement after the decision, he said “inflation will be close to target over the next 12 months.”

The Australian dollar reversed earlier gains and investors slashed bets the RBA will raise rates in the third quarter. The nation recorded its weakest job growth since 1999 in the first four months of this year as manufacturing, services and construction lag behind a mining industry that is expanding to meet Chinese demand for raw materials.

“The statement had a less hawkish feel than previously -- slower employment growth and investment intentions outside the resource sector being revised lower,” said Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney. “It looks like a July rate increase is off the table.”

The local dollar fell to $1.0687 as of 4:07 p.m. in Sydney from $1.0744 before the decision, and the Australian government two-year bond’s yield dropped six basis points to 4.82 percent, the biggest decline since May 23. The benchmark S&P/ASX 200 Index pared a loss of as much as 0.8 percent before the decision and was little changed at 3:21 p.m. in Sydney.

Rate Predictions

Traders bet there is a 10 percent chance Stevens will increase borrowing costs in July, down from 38 percent before today’s announcement, and a 28 percent chance in August, a decline from 60 percent.

Annette Beacher, head of Asia-Pacific research at TD Securities Ltd. in Singapore, said “it appears that the markets are overstating the dovishness” of today’s statement. She said the RBA’s bias toward raising rates is “intact” and that it’s likely to make the next move in August.

Stevens said today’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.”

Record Currency

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.

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

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 today noted that companies not in mining or energy industries aren’t as optimistic.

“Outside the resources sector, investment intentions have been revised lower recently,” he said. “The exchange rate remains, in real effective terms, close to its highest level in several decades. If sustained, this could be expected to exert continued restraint on the traded sector.”

RBA Tightening

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. A June 2 report showing the biggest jump in retail sales in 17 months signaled higher incomes are encouraging consumers to spend more.

Australia’s minimum wage was increased 3.4 percent to A$589.30 a week, the national workplace relations tribunal said June 3. The wage price index rose 3.8 percent in the first quarter from a year earlier, the government reported May 18.

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

--With assistance from Daniel Petrie and Shani Raja in Sydney. Editors: Brendan Murray, Garfield Reynolds

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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