Bloomberg News

RBA See Rate-Cut Scope as Inflation Eases; Currency Falls

October 04, 2011

(Updates with inflation comment in second paragraph, currency’s move in sixth paragraph.)

Oct. 4 (Bloomberg) -- Australia’s central bank signaled it has scope to lower the nation’s benchmark interest rate if necessary as inflation pressures ease, sending the local currency to the lowest level in more than a year.

Governor Glenn Stevens held the overnight cash rate target at 4.75 percent, he said in a statement released today in Sydney, matching the prediction of all 22 economists surveyed by Bloomberg News. The outlook for consumer prices through 2013 “may now be more consistent” with the Reserve Bank’s target of 2 percent to 3 percent, he said.

“An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” Stevens said. “It will take more time for evidence of any effects of the recent European and U.S. financial turbulence on economic activity in other regions to emerge.”

The nation’s dollar fell to the lowest since September 2010 against its U.S. counterpart after the RBA cited “very unsettled” global financial markets and signs of weaker domestic growth. Investors raised to 86 percent the chance that Stevens will lower borrowing costs by 50 basis points, or 0.5 percentage point, next month, according to cash rate futures.

‘Door is Open’

“The door is open to rate cuts if need be -- whether that’s because the global situation deteriorates further or the unemployment rate shifts into a higher range,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “The RBA’s signaling it’s a bit more comfortable on the inflation front.”

The Australian currency fell, trading as low as 94.56 U.S. cents in Sydney from 95.27 cents yesterday in New York and 95.09 cents before the decision. At 6:05 p.m. in Sydney, it fetched 95.20 cents. The local dollar last month dropped by 9.8 percent, the steepest monthly decline since October 2008.

Since the RBA last met on Sept. 6, a government report showed monthly employment growth averaged 2,800 from January through August, less than a 10th of the average of 30,500 in the first eight months of 2010. Australia’s unemployment in August rose for a second straight month, reaching a 10-month high of 5.3 percent.

Today Stevens called the labor market “a little softer” and said consumers are “more concerned about the possibility of unemployment rising.” A weaker job market reduces the likelihood of a “significant acceleration” in labor costs in industries that aren’t benefiting from a mining boom, the RBA governor said.

Slumping Retailers

Myer Holdings Ltd., Australia’s biggest department-store chain, sees consumer confidence at a three-decade low and doesn’t expect any improvement in at least six months, Chief Executive Officer Bernie Brookes said in an interview last week.

“While there remain good reasons to expect solid growth over the medium term, the indications are that the pace of near- term growth is unlikely to be as strong as earlier expected, due both to local and global factors, including the financial turmoil and related effects on business confidence,” he said.

The central bank, which last raised rates in November, has balanced inflation driven by resources investment and a stronger currency that’s hurt manufacturing jobs and damaged confidence.

The so-called Aussie dollar, the world’s fifth-most traded currency, has dropped 14 percent from its record-high $1.1081 reached July 27 as speculation mounts that Greece will default and spur a repeat of the 2008 credit freeze that followed the collapse of Lehman Brothers Holdings Inc.

Trade Windfall

Government reports earlier today showed the strength of the nation’s mining industry and signaled a rebound in building approvals.

Australia’s exports surged in August to a record A$28.4 billion ($27 billion) on coal shipments, and the nation’s A$3.1 billion trade surplus was the second-widest on record. A separate release showed the number of permits granted to build or renovate houses and apartments jumped 11.4 percent from July, the biggest increase since March 2010.

“Australia’s terms of trade are very high, which has increased national income considerably,” Stevens said today, referring to export prices relative to import prices. “Investment in the resources sector is picking up very strongly.”

Stevens reduced rates from 7.25 percent to a 49-year low of 3 percent from September 2008 to April 2009 as the collapse of Lehman worsened a global financial crisis.

The RBA boosted its rate seven times from October 2009 to November 2010, tempering a rise in consumer debt, which more than tripled in the past 20 years to 153.7 percent of disposable income in the second quarter.

--With assistance from Daniel Petrie in Sydney. Editors: Brendan Murray, Benjamin Purvis

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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