Bloomberg News

RBA Weighs Inflation Against Europe Crisis in Holding Rates

June 20, 2011

(Updates with comment from economist in fourth paragraph.)

June 21 (Bloomberg) -- The Reserve Bank of Australia said it will weigh Europe’s sovereign debt crisis against a forecast pickup in domestic growth and inflation in deciding whether 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 in Sydney today. A likely acceleration in inflation from commodities-led growth “suggested that further tightening in monetary policy would be necessary at some point.”

The Australian dollar fell as RBA Governor Glenn Stevens added Europe’s crisis to subdued lending and softer asset prices as reasons for keeping borrowing costs unchanged. He has held the overnight cash rate target at 4.75 percent after seven increases from October 2009 to November 2010, moves that spurred a 20 percent gain in the currency in the past year.

“When you’ve got policy already in modestly restrictive territory, the hurdle to hike is high and one of the prerequisites is that things settle down globally,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “That requires the soft patch we’re seeing in the U.S. to be temporary and that we get some kind of resolution in terms of Greece.”

Local Currency

The Australian currency traded at $1.0552 at 12:21 p.m. in Sydney compared with $1.0611 before the minutes were released.

“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.

The International Monetary Fund last week 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.

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.

‘Quite Subdued’

“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.

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.

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 central bank forecast growth in 2011 at 4.25 percent, in a May 6 policy statement. Consumer prices will rise 3.25 percent over the period and core inflation will quicken to 3 percent from 2.75 percent, it said.

The economy shrank 1.2 percent in the first quarter, the most since 1991, and consumer prices surged 1.6 percent in the period, the biggest increase since 2006, as torrential rains in Queensland state damaged crops and shut coal mines, a government report showed.

Australia’s household savings rate also climbed to 11.5 percent from 9.7 percent in the three months through March from the previous quarter, the June 1 report showed.

“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 today.

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: Stephanie Phang, 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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