Bloomberg News

RBA Holds Rate at 3%, Says Policy Appropriate; Aussie Gains

March 05, 2013

RBA Holds Key Rate at 3%, Reiterates Scope to Ease Further

Glenn Stevens, governor of the Reserve Bank of Australia, center, attends the House Economics committee hearing at Parliament House in Canberra on Feb. 22, 2013. Photographer: Mark Graham/Bloomberg

Australia’s central bank kept its benchmark interest rate unchanged at a half-century low and said policy is appropriate. The local currency climbed as traders pared bets on further reductions in borrowing costs.

Governor Glenn Stevens and his board left the overnight cash-rate target at 3 percent, the Reserve Bank of Australia said in a statement today in Melbourne, as predicted by 27 of 29 economists surveyed by Bloomberg. He said “there are signs that the easier conditions are having some of the expected effects” after 1.25 percentage points of cuts in 2012.

The local currency rose to the highest level in a week-and- a-half, even as Stevens said there is “scope to ease policy further,” as traders bet that policy makers are trying to talk down a currency that is a drag on growth. The central bank extended last month’s pause as prices of key exports including iron ore recovered from 2012’s lows after China boosted infrastructure spending, and as home prices stabilized.

“Tactically it pays the RBA to be dovish because it keeps monetary conditions loose, and should hold the Aussie dollar down somewhat, which is helpful in their plans to rebalance GDP growth,” said Paul Bloxham, chief economist for HSBC Holdings Plc in Sydney and a former RBA official. “We don’t think they’ll be cutting rates any further.”

Currency Reaction

The nation’s currency climbed, trading at $1.0234 at 5:53 p.m. in Sydney from $1.0214 before the decision, extending its longest stretch above parity with the U.S. dollar. Australian three-year government bond yields rose 8 basis points to 2.77 percent, the steepest increase since Jan. 28.

Traders priced in 36 basis points of rate cuts in the coming 12 months, 14 basis points fewer than the previous day, a Credit Suisse AG index based on swaps showed. The nation’s benchmark S&P/ASX 200 Index (AS51) has climbed 9.2 percent this year.

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary,” Stevens said today. “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.”

The RBA reduced the benchmark rate to 3 percent in December, matching a half century low set in 2009, to spur industries including construction as a resource-investment boom is predicted to crest this year.

FOI Documents

The RBA said in documents released last week under a Freedom of Information request by Bloomberg News that the currency is held by as many as 34 central banks and a briefing note for the September board meeting showed models indicated the exchange rate was overvalued by 4 percent to 15 percent. The Aussie traded between $1.0167 and $1.0625 in September.

The Aussie slid 2 percent in February, and yesterday touched the lowest level since July, easing pressure for rate cuts to help counter the currency’s impact.

“With inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate,” Stevens said in the statement. “Businesses are focusing on lifting efficiency under conditions of moderate demand growth.”

Underscoring the decision to leave rates unchanged, government data released today showed Australian retail sales snapped three months of declines in January, rising at more than twice the pace economists forecast.

Investment Outlook

“Present indications are that moderate growth in private consumption spending is occurring,” Stevens said. “The near- term outlook for non-residential building investment, and investment generally outside the resources sector, is relatively subdued, though recent data suggest some prospect of a modest increase during next financial year.”

The RBA last month reduced its growth and inflation forecasts as investment outside mining remains elusive, the labor market softens and the currency contains prices.

In contrast, the economy of China, Australia’s biggest trading partner, expanded 7.9 percent in the final three months of 2012 from a year earlier, the first pickup in eight quarters.

“Growth in China has stabilised at a fairly robust pace,” Stevens said today. “Around Asia generally, growth was dampened by the earlier slowing in China and the weakness in Europe, but again there are signs of stabilisation. Commodity prices are little changed recently, at reasonably high levels.”

On Dec. 27, Perth-based Fortescue Metals Group Ltd. (FMG) announced it will resume work at a suspended project.

Home Prices

Since the RBA’s February meeting, the government reported that unemployment held at 5.4 percent in January as employers added part-time jobs, while a private survey showed consumer confidence surged last month by the most since September 2011.

Australian house prices rose last quarter by the most since June 2010 as lower interest rates lured buyers back into the market. An index measuring the weighted average of prices for established houses in eight major cities advanced 1.6 percent from the previous three months, a Feb. 5 report showed.

“Dwelling investment appears to be slowly increasing, with higher dwelling prices and rental yields,” Stevens said in the statement.

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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