Bloomberg News

RBA Sees Case for Rate Cut If Inflation Eases

April 16, 2012

Glenn Stevens, governor of the Reserve Bank of Australia, and his board reduced borrowing costs twice late last year. Photographer: Sergio Dionisio/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia, and his board reduced borrowing costs twice late last year. Photographer: Sergio Dionisio/Bloomberg

Australia’s central bank said a weaker expansion flowing through to slower inflation would increase prospects for the first interest-rate cut this year, minutes of its April 3 meeting showed.

“Members had lowered their assessment of the pace of growth somewhat,” the minutes released today by the Sydney- based Reserve Bank of Australia showed. “If slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for further easing of monetary policy.”

The minutes reaffirmed that the next rate reduction hinges on an April 24 report on first-quarter inflation, as recent data indicates the economy is growing slower than the central bank predicted. The RBA decided against lowering borrowing costs at its three meetings this year as the global recovery stabilizes and a mining boom sustains domestic growth.

The RBA board will “have the opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices, as well as information on demand and output,” the minutes showed. “Members judged it prudent to evaluate those data before considering a further policy adjustment.”

Currency Drops

The Australian dollar declined after the minutes, trading at $1.0333 as of 12:20 p.m. in Sydney from $1.0342 just before the release and $1.0356 yesterday in New York.

Traders are pricing in a 90 percent chance the RBA will reduce borrowing costs by a quarter percentage point to 4 percent at the next policy meeting on May 1, a Credit Suisse Group AG index showed.

“The April minutes confirm first quarter inflation data will be the key input for the May monetary policy decision,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “We expect inflation remained benign, making a 25 basis-point cut in the bag next month.”

RBA Governor Glenn Stevens and his board reduced borrowing costs twice late last year as employment stagnated and asset prices declined even as resource investment surged and the local dollar strengthened.

“In underlying terms, inflation was expected to remain within the target” of 2 percent to 3 percent over the year ahead, policy makers said in the minutes. “Members again noted that some improvement in productivity growth would be needed to achieve this forecast.”

‘Softer Labor Market’

The nation’s unemployment rate has held at about 5.25 percent for the past six months even as the currency’s strength hurts manufacturing and tourism. “Members noted, however, that an easing in average hours worked and a decline in the participation rate were indicative of a softer labor market than implied by the unemployment rate,” the minutes showed.

Since the April 3 meeting, Australian government data have shown a mixed picture in the domestic economy.

Payrolls rose more than economists forecast in March, capping the best quarter since the final three months of 2010, and the unemployment rate held at 5.2 percent.

Australian home-loan approvals fell for a second month on the fastest exodus of first-home buyers in a decade, and consumer confidence declined to an eight-month low.

‘Sharp Differences’

Policy makers noted “the sharp differences in performance between sectors and regions of the economy, and the considerable structural change that was occurring, as well as the soft overall conditions in the housing sector and the likelihood of a significant fiscal tightening in the next few years.”

Treasurer Wayne Swan is aiming to deliver the nation’s first budget surplus since the global financial crisis when he releases the document for the 2012-13 fiscal year on May 8.

Australia’s currency has remained above parity with the U.S. currency for almost four months as the RBA kept the nation’s benchmark borrowing cost at 4.25 percent, the highest level among major developed nations.

BlueScope Steel Ltd. (BSL), the country’s largest steel producer, shuttered its export division in August. Toyota Motor Corp. and General Motors Co. have cut jobs in Australia this year, citing the currency’s strength.

Policy makers noted in the minutes that the exchange rate has remained high “in the context of an easing in the terms of trade,” referring to a measure of export prices relative to import prices.

U.S. Growth

In the minutes, officials said the U.S. economy’s “moderate expansion” was continuing, while economic conditions in several European countries “remained weak.” Growth in China “had slowed to a more sustainable pace, as the authorities there had intended,” policy makers said.

The expansion in Australia is being driven by China, the nation’s biggest trading partner, which is buying up iron ore, coal and natural gas as millions of people in the world’s most populous nation move to urban centers.

Resource projects in Australia valued at A$456 billion ($472 billion) are spurring companies such as BHP Billiton Ltd. (BHP) to increase hiring.

“Growth in Australia’s major trading partners, weighted by shares of merchandise exports from Australia, was expected to be around average in 2012,” policy makers said in the minutes. “This would be underpinned by the continued economic recovery in the U.S., the prospect of still-solid growth in China, and a recovery of activity in other parts of east Asia.”

Mining investment had increased by about 60 percent in 2011 and with a large number of projects already at a commitment stage, resource investment and export volumes appear likely to increase further in coming years, policy makers said in the minutes.

Australia unexpectedly posted back-to-back trade deficits as coal and metal exports slumped, a government report earlier this month showed.

“Commodity prices have declined for a few months in late 2011 and were noticeably below their peaks, but generally had been relatively stable at quite high levels for the past few months,” policy makers said. “Although Australia’s terms of trade therefore appeared to have peaked, the level remained high.”

To contact the reporter on this story: Michael Heath in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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