Bloomberg News

RBA Holds Key Rate as Household Spending Surges

August 07, 2012

Reserve Bank of Australia Governor Glenn Stevens

Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Brendon Thorne/Bloomberg

Australia’s central bank kept interest rates unchanged at a developed-world high, citing a domestic expansion that’s weathering a global slowdown. The local currency touched the strongest in 4 1/2 months.

Governor Glenn Stevens and his board left the overnight cash-rate target at a 2 1/2-year low of 3.5 percent for a second month, the Reserve Bank of Australia said in a statement today in Sydney. Policy makers lowered rates by 1.25 percentage points from November to June, leaving borrowing costs “a little below their medium-term averages,” Stevens said today.

“While it is too soon to see the full impact of those changes, dwelling prices have firmed a little over the past couple of months, and business credit has over the past six months recorded its strongest growth for several years,” he said. “The exchange rate, however, has remained high, despite the observed decline in the terms of trade and the weaker global outlook.”

The Australian dollar has risen 8.6 percent since the RBA’s last rate reduction on June 5, extending gains that have helped keep core inflation at the lower end of the central bank’s 2 percent to 3 percent target. While Europe’s fiscal crisis is weighing on global growth and Chinese demand for Australian commodities, Stevens’s 75 basis points of cuts in May and June helped boost retail sales and housing in an economy driven by resource investment.

‘Prudent Strategy’

“Unless the volatile situation in Europe deteriorates further, the most prudent strategy for coming months is to hold tight and gauge the impact of earlier monetary stimulus on the domestic economy,” said Katrina Ell, an economist at Moody’s Analytics in Sydney.

The Australian dollar touched $1.0603 after the statement, the highest level since March 20. It traded at $1.0581 as of 3:17 p.m. in Sydney.

Policy makers in Australia’s biggest trading partner, China, lowered rates in June and July, to help protect their economy from Europe’s turmoil.

“China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further,” Stevens said today. “Conditions in other parts of Asia have recovered from the effects of last year’s natural disasters, though the ongoing trend is unclear and could be dampened by the effects of slower growth outside the region. Growth in the United States continues, but at only a modest pace.”

Inflation Pressure

In Australia, a gauge of annual inflation by TD Securities Inc. and the Melbourne Institute released this week showed consumer prices rose at the slowest pace in three years.

“The outlook for inflation is unchanged: it is expected to be consistent with the target over the next one to two years,” Stevens said. “Maintaining low inflation over the longer term will, however, require growth in domestic costs to continue their recent moderation as the effects of the earlier exchange rate appreciation wane.”

Recent reports have shown stronger consumer spending in Australia, fueled by A$2 billion ($2.1 billion) in government carbon rebates and benefit checks paid out since May, as well as four rate cuts since November. Retail sales in June matched the biggest advance since April 2011.

“In Australia, most indicators suggest growth close to trend overall,” Stevens said today. “Labor market data show moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low.”

Mining Boom

Even after the May and June rate cuts, Australia has the highest borrowing costs among major developed nations as Stevens seeks to manage a boom in iron ore, coal and natural gas that is bringing investment projects the government estimates to be worth A$500 billion. Reflecting the resource boom, Australia’s dollar has almost doubled in the past decade against the U.S. currency, the biggest advance among more than 150 currencies tracked by Bloomberg.

The so-called Aussie’s strength is hurting non-resource industries. Private reports last week showed a manufacturing gauge declined in July to the lowest level in three years, and the services industry shrank for a sixth straight month.

Stevens said in June his decisions to cut rates by 25 basis points in November and December, 50 basis points in May and another 25 in June were made easier by the judgment there was a low risk of reigniting a boom in borrowing and home prices.

House Prices

Even so, house prices unexpectedly rose in the three months through June, ending five straight quarters of declines, a government report showed Aug. 1. House and apartment prices in major cities climbed 0.6 percent in July from the prior month, when they rose 1 percent, according to the RP Data-Rismark home value index released on the same day.

A key risk to the global economy remains Europe, and Italy’s Prime Minister Mario Monti warned in an interview published this week of a potential breakup without greater urgency in efforts to lower government borrowing costs.

Monti, in an interview with Germany’s Der Spiegel magazine published Aug. 5, said that disagreements within the 17-nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.

“The most significant area of weakness continues to be Europe, where economic activity has been contracting and policy makers confront the very difficult task of seeking to put both bank and sovereign balance sheets onto a sound footing, while promoting conditions for improved long-term growth,” Stevens said today.

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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