Bloomberg News

RBA Sees Scope to Ease Further After Holding Rate at 3%: Economy

February 05, 2013

Australia Holds Benchmark Rate at 3% as Commodity Prices Rebound

Climbers scale the Sydney Harbour Bridge during a guided tour operated by BridgeClimb in this photograph taken with a fish-eye lens in Sydney, Australia. Photographer: Brendon Thorne/Bloomberg

Australia’s central bank held its benchmark interest rate at the half-century low reached in 2009 and said it has room to cut to a record as a weak labor market contains inflation. Bond yields and the local currency fell.

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand,” Governor Glenn Stevens said in a statement today in Sydney after leaving the overnight cash-rate target at 3 percent. “Looking ahead, with the labor market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labor costs.”

The nation’s currency weakened as Stevens’s statement indicated a willingness to underpin growth and repeated concern about the local dollar’s sustained strength. The Reserve Bank of Australia chief said the economy will likely expand “a little below trend” in the coming year, a less optimistic view than the one he released two months ago.

“We expected that recent optimism around the world economy would not be sufficient to change the bank’s clear bias to further cut rates,” said Bill Evans, chief economist at Westpac Banking Corp. (WBC) in Sydney. “There was considerable encouragement in the statement for our near-term view that they will decide to cut rates by 25 basis points at the next meeting.”

Today’s decision to pause was predicted by 24 of 28 economists surveyed by Bloomberg, with the rest forecasting a 0.25 percentage point cut.

Durable Demand

Supporting his case, Stevens said demand for some durables has improved, house prices have increased and there are signs housing construction is reviving.

“On the other hand, the exchange rate remains higher than might have been expected, given the observed decline in export prices, and the demand for credit is low, as some households and firms continue to seek lower debt levels,” he said.

Australian government three-year bond yields fell nine basis points to 2.85 percent, heading for the steepest decline since September. Traders are pricing in a 55 percent chance he’ll cut rates in March, according to swaps data compiled by Bloomberg.

The so-called Aussie bought $1.0408 at 5:16 p.m. in Sydney compared with $1.0445 before the decision was announced.

Australia’s jobless rate probably rose to 5.5 percent in January, matching the highest since April 2010, according to the median estimate in a Bloomberg News survey ahead of the government’s monthly employment report Feb. 7.

‘Lifting Efficiency’

“Businesses are likely to be focusing on lifting efficiency under conditions of moderate demand growth,” Stevens said today. “These trends should help to keep inflation low, even as the effects on prices of the earlier exchange-rate appreciation wane.”

The consumer price index gained 0.2 percent last quarter from the July-September period, half the level forecast by economists, as food and health-care costs declined.

The government of Prime Minister Julia Gillard, who last week set an election date for Sept. 14, struggled with the currency, which surged 20 percent against the U.S. dollar in the 31 months since she ousted predecessor Kevin Rudd. The gains have hurt tourism, education and manufacturing, which fell to a 3 1/2-year low in January, a private gauge showed last week.

China Reliance

Aiding Australia’s economy, China’s gross domestic product increased 7.9 percent in the last three months of 2012 from a year earlier, the first acceleration in eight quarters. Australian GDP will rise 3 percent this year, compared with 1.5 percent for advanced economies as a group, according to October forecasts from the International Monetary Fund.

“Growth in China has stabilized at a fairly robust pace,” Stevens said in today’s statement. “Around Asia generally, growth was dampened by the earlier slowing in China and the weakness in Europe, but again there are signs recently of stabilization. Some commodity prices have firmed over recent months.”

Prices of Australia’s key export, iron ore, have rebounded since reaching a three-year low on Sept. 5. The Aussie has remained elevated even as the RBA reduced rates by 1.25 percentage points from May to December to spur industries including construction as the resource investment boom is predicted to crest this year.

On Dec. 27, Perth-based Fortescue Metals Group Ltd. (FMG) announced it will resume work at a project suspended after the price of iron ore slumped.

Stocks Fall

The MSCI Asia Pacific Index fell 1.1 percent as of 3:17 p.m. in Tokyo.

Elsewhere in Asia, China’s services industries expanded at the fastest pace in four months in January, according to a survey released by HSBC Holdings Plc and Markit Economics. Indonesia’s gross domestic product expanded 6.11 percent in the fourth quarter from a year earlier, a government report showed.

Retail sales in the euro area probably fell for the fourth time in five months in December, according to a survey of economists before a report scheduled to be released today. Italy’s inflation rate based on European Union measures probably was 2.6 percent in January, unchanged from the pace in December, a separate poll of forecasters showed.

In the U.S., the Institute for Supply Management’s non- manufacturing index probably expanded in January at a slower pace than in the prior month, a survey showed.

Since the RBA’s decision to cut rates Dec. 4, Australian economic data have been mixed.

Earlier today, Bureau of Statistics reports showed Australia posted its narrowest trade deficit in 10 months in December and home prices last quarter jumped by the most in 2 1/2 years.

“During 2012, there was a significant easing in monetary policy,” Stevens said. “Though the full impact of this will still take further time to become apparent, there are signs that the easier conditions are having some of the expected effects.”

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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