Tags: Australia Surprises by Keeping Rates Steady at 4.5 Percent

Australia Surprises by Keeping Rates Steady at 4.5 Percent

Tuesday, 05 Oct 2010 07:35 AM

Australia's central bank left interest rates steady for a fifth month on Tuesday, confounding expectations for a hike, though it did emphasize that higher rates would likely be needed in time to contain inflation.

The Aussie dollar sank almost a cent after the Reserve Bank of Australia (RBA) held its key cash rate at 4.5 percent, when the market had wagered heavily on a rise to 4.75 percent. The central bank's lack of urgency led the market to sharply scale back the expected flight path of future rate moves, though it still implied a 60 percent probability of a hike by Christmas.

In a brief statement after the central bank's monthly policy meeting, RBA Governor Glenn Stevens said only that rates were appropriate for the time being.

"If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target," said Stevens.

The vast majority of analysts had expected a rise this week given RBA officials had recently been vocal in talking about the need for tighter policy to deal with a trade boom.

The market had priced in a more than a 70 percent chance of a move so the steady decision sent the local dollar down sharply to $0.9593. Interbank futures screamed higher and now show a one-in-three chance of a rise in November.

Much might depend on what consumer price (CPI) figures for the third quarter show when released on October 27.

"I think there will be enough in the CPI data to increase interest rates in November," said Stephen Roberts, a senior economist at Nomura who was one of the few that thought the RBA would stand pat this week.

"If the RBA goes once, they will go twice, so November and December but it's contingent on what happens with the CPI, what the inflation outlook is and how growth is evolving as well."

EASING ABROAD

That the RBA is even considering a hike stands in stark contrast to most other developed nations where policy remains super-loose. The Bank of Japan meets Tuesday and is expected to take steps to expand its balance sheet, while the U.S. Federal Reserve is also considering further quantitative easing.

The divergence in policy is one reason the Australian dollar climbed over 8 percent against its U.S. counterpart in September and hit a two-year peak of $0.9751 last week.

But the surge in the dollar has also put a squeeze on manufacturing and tourism, which might have contributed to the RBA's decision to stand steady.

"Maybe it was the high Australian dollar. Maybe all this talk of quantitative easing abroad," said Brian Redican, a senior economist at Macquarie. "It's not clear because the statement actually makes a good case for going now."
In particular, the RBA noted that Australia's surging terms of trade were set to give a substantial boost to incomes.

This good fortune owes much to voracious demand for its resources from China and India, which has driven huge price increases for iron ore and coal, its two biggest exports.

As a result its trade surplus widened to A$2.35 billion (US$2.27 billion) in August, from A$1.74 billion in July. That was the fifth straight monthly surplus worth a combined A$11.1 billion flowing into Australia's A$1.2 trillion-economy.

The resulting rush of cash is fuelling a record surge in mining and energy investment and was a major reason the economy grew a surprisingly strong 3.3 percent in the year to June.

The RBA expects a further acceleration to 4 percent over the next couple of years, which will put a lot of strain on the country's limited spare capacity.

Unemployment in particular is already down to 5.1 percent and leading indicators point to further falls ahead. ANZ chief economist Warren Hogan said the strength in job ads suggested unemployment would drop under 5 percent by year-end. "This will see skills shortages emerge and will put upward pressure on wages growth ahead of the expected peak in Australian economic growth," he said.

The RBA has been counting on consumers to spend less and save more to make room for mining investment to boom without creating inflation. Data out Tuesday showed retail sales rose a modest 0.3 percent in August, mainly due to a drop in spending on clothing.

Yet spending on discretionary items like restaurants and electronics picked up in the month, while industry figures showed new vehicle sales hit a record for September.

© 2017 Thomson/Reuters. All rights reserved.

 
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Australia's central bank left interest rates steady for a fifth month on Tuesday, confounding expectations for a hike, though it did emphasize that higher rates would likely be needed in time to contain inflation. The Aussie dollar sank almost a cent after the Reserve Bank...
Australia Surprises by Keeping Rates Steady at 4.5 Percent
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2010-35-05
Tuesday, 05 Oct 2010 07:35 AM
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