Bloomberg News

Battellino Signals No Urgency to Cut Rates as RBA Gauges EU

October 24, 2011

(Updates with response to audience questions in seventh, eighth paragraphs; comment from economist in 10th.)

Oct. 25 (Bloomberg) -- Reserve Bank of Australia Deputy Governor Ric Battellino signaled no urgency to lower the developed world’s highest interest rates as policy makers weigh weak growth abroad against a domestic mining boom.

“It remains to be seen how the Australian economy will respond to the recent financial volatility and the consequent fall in confidence and the loss of wealth,” Battellino said in a speech today in Sydney.

A week before the central bank’s next rate-policy meeting, the RBA’s No. 2 official said there had already been some easing in Australia’s financial conditions. Market interest rates have fallen and the nation’s currency has undergone a “modest” decline, leading to “reduced pressure on some sectors of the economy,” he said.

The RBA has held its benchmark rate at 4.75 percent since November to gauge the effects of natural disasters at home earlier this year and, in recent months, global financial turmoil. The European debt crisis has dimmed prospects for growth around the world including in Australia, the only major developed economy to avoid the 2009 global recession.

Scope to Cut

In his speech, Battellino reiterated that the RBA has scope to reduce borrowing costs if needed as a slower domestic expansion eases inflation concern.

A government report tomorrow will show the nation’s annual inflation rate slowed last quarter for the first time this year, according to a Bloomberg News survey of economists.

Battellino declined to answer an audience question on whether the RBA would cut rates at its Nov. 1 policy meeting.

“The question that has to be decided is, is the economy growing at a pace that is consistent with stable inflation,” he said in response to a separate question. “In reaching that view, there’s obviously a whole range of economic indicators we’re looking at.”

Investors have pared bets on the prospects of a rate reduction and its size. Traders now see a 70 percent chance the central bank will lower borrowing costs by a quarter percentage point next week, compared with a 75 percent of a half-point cut on Oct. 5.

“Battellino did not give the impression that he was pushing the board to cut rates,” Roland Randall, an economist at TD Securities Inc. in Singapore, said in a research report after today’s speech.

N.Z. Inflation

In New Zealand today, a government report showed inflation slowed by more than economists forecast in the third quarter, giving its central bank scope to keep rates unchanged at a record-low until next year.

Battellino said that in Australia, as in the U.S., the flow of recent monthly economic data has been “a little better than might have been expected given the volatile financial environment.” He cited a pickup in retail sales and home loan approvals, measures of business conditions remaining around average levels and a stronger jobs report.

Australia’s unemployment rate declined last month for the first time since March, a government report showed Oct. 13, as the number of people employed rose by 20,400. The jobless rate fell to 5.2 percent from 5.3 percent.

Not Spreading

“As yet there have not been signs outside Europe that the rate of growth of economic activity has taken another step down since the recent bout of financial volatility,” Battellino told Citigroup Inc.’s 3rd Annual Australian & New Zealand Investment Conference. “It is, however, still too soon to conclude that this will not happen.”

Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, said yesterday there’s a 50 percent risk that the U.S., the U.K. and the euro region will slip into recession in the next 12 months. Business confidence in Germany, Europe’s biggest economy, slumped to a 16-month low in October and euro- area consumer sentiment also weakened.

Australia’s economy is being driven by demand from developing nations including China and India for iron ore, coal and natural gas. The central bank said this month the value of liquefied natural gas projects announced so far in 2011 is around A$70 billion ($73 billion).

‘Some Softening Ahead’

“The latest data available to the Bank on shipments of Australian coal and iron ore to China (these are up to September) suggest that shipments have held up, though the weakening in iron ore prices over the past couple of weeks may be pointing to some softening ahead,” Battellino said.

Demand for Australian resources and interest rates that are 2.25 percentage points higher than any other developed nation spurred the Australian dollar to $1.1081 on July 27, the highest level since it was freely floated in 1983. It depreciated 10 percent last quarter as employment growth slowed and global risks increased.

“Overall, while it is possible that the global economic situation might take a sharp turn for the worse, at this stage the bank’s central scenario is that global GDP growth will be broadly in line with its long-run average over the period ahead,” Battellino said. “That would create a reasonably benign environment for the Australian economy. The global situation remains fragile, however, and will require careful monitoring.”

--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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