Bloomberg News

RBA Holds Rate at 4.75% as Growth Outlook Dims; Currency Weakens

July 05, 2011

July 5 (Bloomberg) -- The Reserve Bank of Australia left its benchmark interest rate unchanged and said the nation’s growth pace may be weaker than previously forecast, triggering the local currency’s biggest drop in about three weeks.

Governor Glenn Stevens held the overnight cash rate target at 4.75 percent in Sydney for the seventh straight meeting, as forecast by all 28 economists surveyed by Bloomberg News. He said in a statement that inflation is expected to near the RBA’s 2 percent to 3 percent target in the next year.

Stevens’s decision to extend a pause in raising rates reflects slowing expansions from Asia to Europe that dimmed prospects for an acceleration in hiring at home by mining companies including BHP Billiton Ltd. Stevens said a European debt crisis had “added to uncertainty” about the outlook for the world economy.

“The statement highlights the importance of the global growth picture to the RBA’s policy deliberations and the implications for domestic growth,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. She said she plans to change her forecast for the next rate rise to late in the fourth quarter, from August.

The Australian dollar fell against all its major counterparts after the decision, trading at $1.0682 as of 3:30 p.m. in Sydney from $1.0734 in New York yesterday.

2011 Growth

“Growth through 2011 is now unlikely to be as strong as earlier forecast,” Stevens said in today’s statement, retreating from the RBA’s May 6 prediction that the economy will expand 4.25 percent this year, the fastest pace since 1999.

Australia’s economy shrank 1.2 percent in the first quarter, the most since 1991, as floods in the northeast slashed coal exports. The nation’s recovery may be more prolonged after a report last month showed the number of full-time jobs fell by 79,200 in May and April, the biggest two-month decline in more than two years. The jobless rate held at 4.9 percent.

“A gradual recovery from the floods and cyclones over the summer is taking place, though the resumption of coal production in flooded mines continues to proceed more slowly than initially expected,” Stevens said. “The recovery will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way.”

Dollar’s Rise

The RBA has relied on the Australian dollar’s strength to temper inflation. The local currency has risen 27 percent in the past year and reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983.

That appreciation mirrors rising global demand for Australian iron ore, coal and other resources, with the RBA’s commodity price index advancing about 40 percent in May from a year earlier in U.S. dollar terms.

The RBA said in its May 6 forecasts that consumer prices will rise 3.25 percent this year and core inflation, which excludes the most volatile prices, will reach 3 percent.

“CPI inflation is expected to be close to target over the next 12 months,” Stevens said today. “In underlying terms, inflation has been in the bottom half of the target range, though a gradual increase is expected over time.”

Household spending accounts for 55 percent of Australia’s economy, and the central bank has sought to restrain consumption with 175 basis points of rate increases from October 2009 to November, letting investment in mining drive growth. A report yesterday showed retail sales unexpectedly dropped 0.6 percent in May from a month earlier, the second fall in three months.

Employment ‘Falling’

“The Reserve Bank finally gets it,” said Craig James, a Sydney-based senior economist at Commonwealth Bank of Australia, the nation’s biggest lender. “You only lift interest rates if you feel that a strongly performing economy will generate inflationary pressures. And that is clearly not the case at present. Employment has been falling, home prices are going backwards and consumers refuse to spend.”

The economy of China, Australia’s biggest trading partner, is also slowing. China’s non-manufacturing industries expanded at the weakest pace in four months in June, a report showed yesterday.

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

European finance ministers agreed over the weekend to disburse 8.7 billion euros ($12.6 billion) of loans to Greece under last year’s 110 billion-euro bailout by July 15, rewarding Greek Premier George Papandreou for pushing an extra austerity plan through parliament.

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

--With assistance from Daniel Petrie in Sydney. Editors: Brendan Murray, Chris Anstey

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


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus