Bloomberg News

RBA Saw Local Growth Outweighing Global Slump in Rate Pause

August 20, 2012

Australia’s resource-driven domestic economic growth overshadowed a “fragile” global outlook in the Reserve Bank’s decision to hold interest rates unchanged for a second month, minutes of its Aug. 7 policy meeting showed.

“With inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the board judged the stance of monetary policy remained appropriate,” according to minutes released today in Sydney explaining why the overnight cash rate target was held at 3.5 percent.

The decision to extend the pause after 1.25 percentage points of reductions from November to June reflected stronger household spending, a pipeline of capital spending and higher home prices that signaled the economy is weathering a global slowdown. Since the RBA last lowered rates on June 5, the local dollar has risen 7.2 percent as investors seek the yield offered by the highest benchmark among major developed nations and a haven from risk elsewhere.

“The global economic environment remained fragile, with the uncertainty emanating from the euro area affecting financial markets and potentially delaying spending by firms and households,” policy makers said in the minutes. “The exchange rate had remained at a relatively high level notwithstanding the weakening in the global outlook and decline in commodity prices.

The RBA said in the minutes that the Swiss National Bank had purchased about 100 billion euros ($123.5 billion) over May and June and that further large purchases probably occurred in July to maintain the franc’s peg against the euro and avert inflation pressures.

SNB Purchases

‘‘While some of these purchases were retained in euros, a sizeable share was converted into other currencies, including a modest amount in the Australian dollar,’’ the minutes showed.

The Australian dollar advanced to $1.0462 as of 11:32 a.m. in Sydney, from $1.0455 before the minutes. It has averaged $1.02 in the past two years, up from 72 U.S. cents for the prior decade. At the same time, the terms of trade, a measure of export prices relative to import prices, fell in June to the lowest since 2010, after reaching a 140-year high last year.

Since RBA Governor Glenn Stevens’s decision to extend the rate pause, government reports painted a mixed picture of the economy: employment and wages gained and home-loan approvals rose the most this year, while consumer confidence dropped by the most in five months.

‘‘There were indications that consumer spending had retained some momentum in the June quarter, even though consumer spending remained at subdued levels,’’ the minutes showed. ‘‘Earlier falls in interest rates and rising rental yields were likely to have increased the attractiveness of housing investment.’’

Rate Outlook

Traders are pricing in just a 28 percent chance that the RBA will resume rate cuts next month and lower borrowing costs by a quarter percentage point to 3.25 percent, according to data compiled by Bloomberg based on swaps trading.

The central bank said there were indications that growth in China, Australia’s largest trading partner, ‘‘appeared to be stabilizing’’ at a more sustainable pace.

China’s economy expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years, as Europe’s debt crisis crimped exports and the government’s property crackdown cooled domestic demand. The slowdown may extend into a seventh quarter, with Deutsche Bank AG cutting its growth estimate for the three months through September to 7.5 percent from 7.9 percent.

Housing Stability

‘‘There were signs that investment growth had steadied and some early indications that conditions in the housing market had also improved a little in recent months,” the RBA said, referring to China.

Powering the Australian economy is the biggest resource boom since a gold rush in the 1850s. The latest bonanza -- for iron ore, coal and natural gas -- is bringing investment projects the government estimates to be worth A$500 billion and helped keep the unemployment rate at 5.2 percent last month. That’s lower than 8.3 percent in the U.S. and 11.2 percent in the euro area.

“Employment growth continued to reflect the net effect of strong growth in resource, resource-related, health and education industries, and structural developments that had created pressure for labor shedding in some non-resource industries including retail trade, manufacturing and construction,” the RBA said.

Mining companies including BHP Billiton Ltd. and Rio Tinto Group are benefiting from demand for steel and electricity in emerging economies including China and India.

Mining Boom

“Additional large resource projects had commenced or received approval in recent months, thereby sustaining the very large stock of work in the pipeline,” the RBA said. “This had occurred despite some mining companies adopting a more cautious approach to potential, but yet to be approved, investment projects.”

Australia’s policy rate compares with those near zero in the U.S. and Japan, 0.5 percent in the U.K., 1 percent in Canada, 0.75 percent in the euro area and 2.5 percent in New Zealand.

Europe’s leaders are returning from vacation with agreement still elusive on measures to support Greece and to prevent Spain and Italy being shut out of sovereign debt markets. Spain urged unlimited European Central Bank support over the weekend after its 10-year bonds last week advanced for the first time this month, as German Chancellor Angela Merkel signaled conditional support for the ECB’s plan to help reduce indebted countries’ borrowing costs.

“While the competitiveness of the crisis economies had been improving, members noted that further significant economic adjustment seemed necessary and the challenges ahead for the euro area remained substantial,” the RBA said.

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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