Bloomberg News

RBA Weighs Europe Debt, Mine-Fueled Inflation in Holding Rates

June 20, 2011

June 21 (Bloomberg) -- The Reserve Bank of Australia said it will weigh Europe’s sovereign debt crisis against a pickup in domestic growth and inflation in deciding when to increase interest rates, minutes of its June 7 meeting showed.

“Members judged that it would be prudent to leave the stance of policy unchanged, pending further data on international developments,” according to the minutes released today in Sydney. A likely acceleration in inflation from commodities-led growth “suggested that further tightening in monetary policy would be necessary at some point.”

RBA Governor Glenn Stevens has paused at 4.75 percent after seven increases in the overnight cash rate target from October 2009 to November, moves that helped spur a 21 percent gain in the currency in the past 12 months. Stevens added Europe’s debt crisis to subdued lending, softer asset prices and the deflationary effects of the currency’s rise to his reasons for keeping borrowing costs unchanged.

“The flow of data over the past month had not added any urgency to the need for an adjustment to policy,” the minutes showed. “Downside risks to the international economy had become a little more prominent.”

European finance chiefs have said further aid to save Greece from a default hinges on Prime Minister George Papandreou passing laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.2 billion) promised for July.

A default by Greece is “almost certain” and may help push the U.S. economy into a recession, Alan Greenspan, former Federal Reserve chairman, said in a June 16 interview with Charlie Rose in New York.

U.S. Growth

The International Monetary Fund on June 17 cut its forecast for U.S. growth in 2011 for the second time in two months, warning that further setbacks to the recovery pose growing threats to the world economy, along with potential contagion from the European debt crisis.

By contrast in Australia, the government forecasts mining investment of A$76 billion ($80 billion) next fiscal year, spurring companies to hire workers and prompting the RBA to predict unemployment will fall to 4.25 percent by December 2013.

“While there had been additional evidence of the coming strong pick-up in investment in the resources sector, activity remained quite subdued in some other important parts of the economy, partly reflecting the board’s earlier actions as well as the appreciation of the exchange rate,” policy makers said.

Gauges of Australian services, construction and manufacturing all declined in May as the currency reached a record. A private report last week showed Australian consumer confidence fell in June to the lowest level in two years.

Jobs Report

A government report this month showed the number of full- time jobs fell by 22,000 in May after dropping 57,200 in April, the biggest two-month decline in more than two years. The jobless rate held at 4.9 percent.

The RBA’s 175 basis points of rate increases helped Australia’s currency surpass $1.10 last month, the highest level since it was freely floated in 1983. In contrast, the U.S. Federal Reserve has kept its main interest rate near zero since December 2008.

The central bank, in a May 6 policy statement, forecast growth in the year through to the final quarter of 2011 at 4.25 percent, unchanged from its February estimate. Consumer prices will rise 3.25 percent over the period, from a previous prediction of 3 percent, and core inflation will quicken to 3 percent from 2.75 percent, it said.

Resources Investment

Two coal-seam gas projects, expected to cost more than A$30 billion, are proceeding near the Queensland port of Gladstone. Santos Ltd., Australia’s third-largest oil producer, and BG Group Plc, the U.K.’s third-biggest gas producer, will start hiring the first of more than 10,000 construction workers needed for the two projects later this year.

Australian consumer prices surged 1.6 percent in the first quarter from three months earlier, the biggest increase since 2006, driven by fruit and vegetable costs as torrential rains in Queensland state shut coal mines and damaged crops. In February, a cyclone slammed into Queensland’s north coast.

The nation’s economy shrank 1.2 percent in the first quarter, the most since 1991, as the floods slashed coal exports, a June 1 report showed.

Loans provided by Australian banks and finance companies were flat in April from the previous month, the RBA said in a May 31 report. Australia’s household savings rate climbed to 11.5 percent from 9.7 percent in the previous quarter, a government report showed June 1.

“Members observed that the saving ratio was now back to levels seen in the mid-1980s and that the increase from earlier unsustainably low levels was a positive development,” the minutes showed.

Household spending accounts for 54 percent of Australia’s economy, and a government report this month showed retail sales rose in April by the most in 17 months, climbing 1.1 percent.

--Editors: Malcolm Scott, Victoria Batchelor.

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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