The Reserve Bank of Australia left its benchmark interest rate unchanged today for a fifth straight meeting, signaling a record local dollar will help contain consumer prices until late this year.
“The rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters,” RBA Governor Glenn Stevens said in a statement today after holding the overnight cash rate target at 4.75 percent, as forecast by 21 of 22 economists surveyed by Bloomberg News. “Over the longer term, inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.”
Australia’s currency surpassed $1.10 this week as surging mining investment cuts the economy’s spare capacity, and Federal Reserve policy makers said April 27 U.S. borrowing costs are likely to stay low for “an extended period.” Reports last month showed lending to Australian business surged and inflation accelerated to the fastest pace since 2006.
“The currency is clearly doing some of the RBA’s work for it,” said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney who predicts the central bank’s next rate increase will be in October. “The currency is probably the most significant development since they last met and they are aware that it’s in unchartered territory.”
Currency’s Reaction
The Australian dollar maintained earlier declines after the decision, trading at $1.0909 as of 3:26 p.m. in Sydney, from $1.0921 before the statement and $1.0944 yesterday in New York.
Stevens, the only developed-nation central banker whose economy avoided recession as credit markets froze in 2008, has refrained from raising borrowing costs since November after flooding damaged crops and disrupted coal mines in Queensland state, which supplies more than 30 percent of the nation’s fruit and vegetables.
Today in his statement, Stevens said the resulting loss of coal production likely “caused a decline in real gross domestic product in the March quarter.” The first-quarter GDP report from the Bureau of Statistics is scheduled to be released June 1.
Traders see a 34 percent chance Stevens will boost borrowing costs by a quarter percentage point in August, bank bill futures showed, down from 44 percent before today’s announcement.
In the statement, Stevens said “in future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation.”
Rate Differences
Australia’s benchmark rate contrasts with near-zero levels in Japan and the U.S., helping drive the currency to the strongest level since it was freely floated in 1983.
The Australian dollar touched $1.1012 yesterday and an April 27 inflation report showed prices rose 1.6 percent in the first quarter from the previous three months and were 3.3 percent higher than a year earlier, prompting speculation the RBA will raise rates sooner than the Fed.
The RBA aims to keep annual inflation in a range of 2 percent to 3 percent on average.
While the currency’s rise has eased the RBA’s task of controlling inflation by reducing import costs, it has hurt some manufacturers that sell goods abroad.
In parts of the nation’s economy, particularly urban areas not linked to the mining boom, “people are not doing it easy,” Australia & New Zealand Banking Group Ltd. Chief Executive Officer Mike Smith said in a briefing with reporters today. The recent acceleration in inflation is a “blip” triggered by natural disasters and the nation’s rising currency is “doing the work of the central bank,” he said.
Mining Boom
Australia’s terms of trade, a ratio of export prices to import prices, are at their highest level since the early 1950s. “Australia’s terms of trade are reaching higher levels than assumed a few months ago, and national income is growing strongly,” Stevens said today.
Wage pressure from the mining industry is intensifying inflation concerns.
Two coal-seam gas projects, expected to cost more than A$30 billion ($32.7 billion), are proceeding near the Queensland port of Gladstone. Santos Ltd. (STO), Australia’s third-largest oil producer, and BG Group Plc, the U.K.’s third-biggest gas producer, will start hiring the first of more than 10,000 construction workers needed for the two projects this year.
‘Strongest Signal’
“It is significant that the terms of trade are running above what they were forecasting,” said RBC’s Ong. “At the end of the day, that’s what’s going to drive stronger business investment and income and employment. So I think that is your strongest signal of a tightening bias and why you would need to hike.”
A central bank report last week showed loans provided by Australian banks and finance companies increased 0.6 percent in March from the previous month, matching the biggest monthly advance since January 2009.
Lending to companies gained 1 percent in March, the biggest rise since October 2008 and the third straight monthly gain, it showed. Business lending had declined for six consecutive months through December, falls noted by the RBA in its statements.
Australia had its biggest annual increase in jobs on record last year and employers added more workers in March than economists forecast, lowering the jobless rate to 4.9 percent.
“Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010,” Stevens said today. “Reports of skills shortages remain confined, at this point, to the resources and related sectors.”
Wage Growth
Growth in wages has returned to levels seen prior to the global recession, he said.
The Reserve Bank in February raised its forecast for 2011 growth to 4.25 percent, from a November prediction of 3.75 percent, saying flood rebuilding will accelerate in the second half. It will update those estimates in its quarterly monetary policy statement to be released on May 6.
Stevens boosted the benchmark lending rate by 175 basis points from early October 2009 to November last year from a half-century low of 3 percent during the global financial crisis.
Treasurer Wayne Swan welcomed today’s decision, saying it is “good news for the many Australian households and businesses doing it tough in our patchwork economy, with the higher dollar making things even tougher in some sectors.”
Swan will release the nation’s budget on May 10.
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