Australia Keeps Key Interest Rate Unchanged at 3%
Australia’s central bank kept interest rates unchanged for a fourth month as evidence mounts that the lowest borrowing costs in half a century are helping the economy rebound from the global recession.
Reserve Bank Governor Glenn Stevens left the overnight cash rate target at 3 percent in Sydney today, as forecast by all 19 economists surveyed by Bloomberg News.
Australia’s economy is stronger than the central bank forecast a few months ago, “with both consumer spending and exports notable for their resilience,” Stevens said today. The governor signaled last week he may not wait for unemployment to peak before raising rates, spurring speculation Australia will increase borrowing costs faster than most other nations.
Stevens’ “focus is now on the exit strategies from the extraordinarily accommodative monetary and fiscal policies in place,” Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney, said ahead of today’s decision.
The Australian dollar traded at 84.33 U.S. cents at 2.40 p.m. in Sydney from 84.40 cents just before the decision was announced. The two-year government bond yield fell 1 basis point to 4.37 percent. A basis point is 0.01 percentage point.
Signs of rising consumer and business confidence “suggests the risk of a severe contraction in the Australian economy has abated,” Stevens said. “The present accommodative setting of monetary policy is appropriate given the economy’s circumstances.”
Retail Sales
Reports published today showed retail sales climbed more than economists forecast in the second quarter and house prices surged for the first time more than a year.
Stevens, who warned last week about the risks of a house- price bubble after slashing borrowing costs by a record 4.25 percentage points between September and April, said on July 28 that “hopefully” policy makers will find “a suitably timely way of returning to normal when the right time for that comes.”
The governor today dropped references made in previous statements that policy makers have scope to reduce borrowing costs further if needed to stoke domestic demand.
Investors predict the benchmark rate will be 150 basis points higher in a year, a Credit Suisse Group AG index based on swaps trading showed at 2:43 p.m. in Sydney. By contrast, the Bank of England’s key rate will be raised by 106 basis points and the U.S. Federal Reserve’s rate by 90, according to separate indexes. A basis point is 0.01 percentage point.
Roubini’s View
Nouriel Roubini, the New York University economist who predicted the global financial crisis, told a mining conference in Western Australia yesterday that Australia’s central bank may be one of the first to increase borrowing costs business card.
An index measuring the weighted average of prices for established houses in the eight capital cities climbed 4.2 percent from the first quarter, when it declined a revised 1.5 percent, the Australian Bureau of Statistics said in Sydney today. The median estimate of 15 economists surveyed by Bloomberg News was for a 2 percent gain.
Stevens said last week it will be “quite disturbing” if the cuts to borrowing costs result in higher prices and not many more new dwellings, and may increase the risk of “problems of over-leverage and asset-price deflation down the track.”
Retail sales, which jumped 2 percent in the June quarter, beating the 1.3 percent median estimate of analysts surveyed by Bloomberg, account for as much as 25 percent of gross domestic product, Macquarie Group Ltd. economist Ben Dinte said today.
Government Spending
Household spending helped Australia’s economy avoid a recession after GDP rose 0.4 percent in the first quarter from the previous three months, when it shrank 0.6 percent. Second- quarter growth figures will be released on Sept. 2.
“Stronger dwelling activity and public spending will start to provide more support to overall demand soon, and is likely to firm into 2010,” Stevens said today.
The central bank, which predicted in May that GDP would contract 1 percent this year before expanding 2 percent in 2010, will publish revised forecasts on Aug. 7.
Australia was “the last OECD country to go into this problem and we’re probably going to be the first OECD country to come out of it,” Michael Smith, chief executive officer of Australia & New Zealand Banking Group Ltd., said in a Bloomberg television interview today.
A surge in consumer spending is boosting earnings at companies including David Jones Ltd. The nation’s second-largest department store chain said on June 30 that earnings after tax will rise by between 20 percent and 30 percent in the six months ending July 25.
Prime Minister Kevin Rudd’s government has distributed A$12 billion ($10.1 billion) in cash handouts to households this year and is spending A$22 billion to upgrade roads, railways, ports and schools.