Bloomberg News

RBA Saw Half-Point Cut Needed to Revive Growth, Minutes Show

May 15, 2012

Glenn Stevens, governor of the Reserve Bank of Australia, slashed the overnight cash rate target by half a percentage point to a two-year low of 3.75 percent. Photographer: Ian Waldie/Bloomberg

Glenn Stevens, governor of the Reserve Bank of Australia, slashed the overnight cash rate target by half a percentage point to a two-year low of 3.75 percent. Photographer: Ian Waldie/Bloomberg

The Reserve Bank of Australia made its deepest interest-rate cut in three years to help revive below-average growth, counter rising mortgage costs and shore up consumer confidence, minutes of its May 1 meeting showed.

“Growth outside of the mining sector was expected to be below trend in the near term, affected by the high exchange rate, softer government spending and subdued conditions in the housing market and building industry,” the minutes released today in Sydney showed. “With financial markets remaining unsettled, the risks emanating from Europe continued to cloud the global outlook.”

Governor Glenn Stevens slashed the overnight cash rate target by half a percentage point to a two-year low of 3.75 percent, with core inflation slowing to a 13-year low, export and house prices slumping, and consumer confidence weakening. Most economists had forecast a quarter-point reduction. Traders are pricing in an 84 percent chance of a quarter-point cut at the RBA’s June 5 meeting.

Australia’s four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate reductions to mortgage holders. The minutes showed the RBA’s decision on the size of a cut reflected a need for lower consumer rates.

‘Necessary’ Cut

“Members noted that interest rates faced by the general community had tended to increase a little since the board’s previous change to the cash rate in December,” the minutes showed, referring to two quarter-point cuts late last year. “The board decided that a reduction of 50 basis points in the cash rate was, in this instance, necessary to deliver the appropriate level of borrowing rates.”

The Australian dollar fell to the lowest this year after the minutes were released, touching 99.45 U.S. cents before trading at 99.84 cents as of 2:46 p.m. in Sydney, from 99.58 cents yesterday in New York.

“The bias is firmly toward further easing given global uncertainty and domestic weakness in the non-mining sectors,” said Katrina Ell, an economist at Moody’s Analytics in Sydney.

The RBA, in its quarterly monetary policy statement released May 4, cut growth and inflation forecasts. It predicted average growth of 3 percent in 2012, down from a February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is forecast at 2.25 percent from a previous estimate of 2.75 percent, the RBA said.

Inflation Target

“Inflation was likely to remain in the lower half of the target range over the foreseeable future, with cost pressures expected to be contained given the forecast for moderate growth in the economy,” policy makers said today, citing staff estimates.

The central bank aims to keep inflation in a 2 percent to 3 percent range on average.

The local currency has fallen 4.2 percent this month against the U.S. dollar on concern Greece will leave the euro bloc. Treasury Secretary Martin Parkinson said today the global outlook remains uncertain.

“We are particularly worried by the euro-zone situation, which is why our forecasts for European growth are markedly weaker than those of the International Monetary Fund,” Parkinson, the Treasury’s top bureaucrat who also sits on the RBA’s board, said in a speech today in Sydney.

Greece Concerns

Greek President Karolos Papoulias will attempt to persuade divided party leaders today to accept his proposal for a government of prominent non-politicians to steer the country and avert new elections as doubts mount that Greece can avoid an exit from the euro area.

Greece’s post-election impasse multiplied the signs of stress in European markets yesterday. The euro fell for the 10th time in 11 days and stocks surrendered a two-day gain. Bond yields in recession-wracked Spain, the next potential candidate for financial support, touched a five-month high.

Australia’s economy is being driven by the biggest resource bonanza since the 1850s as China and India increase demand for minerals and energy. In contrast, tourism, manufacturing and retail industries have suffered under the local currency’s sustained strength.

“If subdued growth in the non-mining economy results in further increases in spare capacity, putting downward pressure on inflation, monetary policy is more likely to be an effective remedy as these sectors are typically more sensitive to interest rates and exchange rates,” Parkinson said in a post-budget speech.

Currency’s Retreat

The Australian dollar, the world’s fifth-most traded currency, has gained about 33 percent in the past three years as the mining boom spurs growth. It dropped below parity with the U.S. dollar this week for the first time since December.

Parkinson today praised the floating exchange rate, saying it has helped absorb the nation’s mining investment boom.

“While the high dollar weighed heavily on some sectors of the economy -- as it continues to do so -- it helped spread the benefits of the boom and shield the macro-economy from the shock by helping to bring down the price of imported consumer goods,” he said.

Even so, Australia’s jobless rate unexpectedly fell in April to 4.9 percent from 5.2 percent in March as hiring accelerated in mining states including Western Australia, the statistics bureau said in Sydney on May 10. Economists forecast a rise to 5.3 percent.

Surplus Goal

Parkinson said Australia’s economy is in a good position to return to surplus in the fiscal year starting July 1 as Prime Minister Julia Gillard’s government projected last week.

“In an economy with unemployment forecast to be not far from reasonable estimates of its lowest sustainable rate, and commodity prices remaining near historical highs, it is appropriate that the budget return to surplus to remain consistent with the medium-term fiscal objective,” he said.

The RBA’s minutes reflected concern about residential construction. Australian house prices fell for a fifth consecutive quarter in the three months through March and demand for housing finance has remained weak.

“Despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction,” the minutes showed.

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


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus