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Australia Keeps Key Rate at 4.5% as Inflation Cools

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  • Australia Keeps Key Rate at 4.5% as Inflation Cools

    Australia Keeps Key Rate at 4.5% as Inflation Cools

    By Jacob Greber - Aug 3, 2010
    Australia’s central bank kept interest rates unchanged for a third month after slower inflation and diminished financial risks abroad left officials with little need for any shift in policy.
    Governor Glenn Stevens maintained the overnight cash rate target at 4.5 percent, the Reserve Bank of Australia said in Sydney, matching all 23 economists’ forecasts in a Bloomberg News survey. The statement cited reduced pressure on house prices, less “caution” in financial markets after stress tests on Europe’s banks and an outlook for Australian economic growth that’s “about trend.”
    “It signals a very comfortable wait-and-see approach for the Reserve Bank,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. “At some point cash rates may need to go higher but there’s no pressing urgency.”
    Australia’s stocks closed at the highest level in more than a month after the decision. The pause in rate increases is also a reprieve for Prime Minister Julia Gillard, who is level with opposition leader Tony Abbott in some polls ahead of an Aug. 21 federal election. Both candidates are aiming to win electorates in western Sydney and Queensland that have large numbers of households with mortgages.
    Scope for Pause
    The weakest consumer price inflation in three years last quarter increased Stevens’s scope to extend the rate pause after six increases since early October. The RBA said in minutes of last month’s meeting that Europe’s stress tests, along with local inflation data, would determine whether it would resume the Group of 20’s most aggressive round of monetary tightening.
    The S&P/ASX 200 index of shares rose 0.7 percent to 4,571.60 at the close in Sydney. The Australian dollar was unchanged at 90.97 U.S. cents at 4:41 p.m.
    “With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate,” Stevens said in today’s statement.
    Australia’s quarterly inflation report on July 28 showed that core prices, as measured by the central bank’s so-called trimmed mean gauge, rose 2.7 percent in the second quarter from a year earlier. Stevens aims to keep price gains between 2 percent and 3 percent.
    “Through to mid-2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 percent for a few quarters due to the impact” of increased tobacco taxes and utilities, Stevens said.
    European Banks
    While policy makers said last month they were concerned about the outcome of stress tests on European banks, today’s statement said the results helped ease tensions on the market.
    “The caution evident in financial markets in the past few months has abated of late, helped by the disclosure of information about European banks,” Stevens said. “Nonetheless, the global outlook remains somewhat more uncertain than a few months ago and this is reflected in the volatility of financial prices.”
    Only seven of the 91 European Union banks subject to stress tests last month failed, with a combined capital shortfall of 3.5 billion euros, about a 10th of the lowest analyst estimate.
    The results helped ease investor concern that Europe’s sovereign-debt crisis will push advanced economies back into a recession. The Standard & Poor’s 500 Index of U.S. stocks surged to its highest close in 10 weeks yesterday.
    Retail Sales
    Today’s decision came just hours after reports showed Australian home-building approvals and retail sales missed economists’ forecasts in June. Approvals have fallen for five of the first six months this year.
    “Credit outstanding for housing has continued to expand, but the upward pressure on dwelling price appears to have abated,” Stevens said.
    Even so, some economists including Bill Evans at Westpac Banking Corp. say policy makers will resume raising borrowing costs early next year as the economic rebound worsens a skills shortage that threatens to stoke wage growth. That may be particularly true in Western Australia, where Chevron Corp.’s A$43 billion ($39 billion) LNG gas project is under construction.
    Australia’s jobless rate was 5.1 percent in June, below Japan’s level and almost half that of the U.S. Western Australia’s rate was 4 percent.
    ‘Around Their Peak’
    Stevens said today the nation’s terms of trade, a measure of income from exports, “are around their peak of two years ago” and the economy’s growth is likely to be “close to trend.”
    The governor’s six rate increases since October added about A$3,600 a year to loan repayments on an average A$300,000 mortgage. Still mortgages repayments are around A$2,800 lower per year than they were under former Prime Minister John Howard, who lost office in November 2007, Gillard told reporters in Newcastle, north of Sydney.
    Today’s decision is “welcome news for families and businesses that are doing it tough,” she said. Rate increases are particularly sensitive for political leaders in Australia, where more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.
    The Liberal-National Coalition has drawn level with Gillard’s Labor party in popularity, a Newspoll opinion survey published by the Australian newspaper yesterday showed.
    Stevens has led policy makers around the Asia-Pacific region by returning borrowing costs to what he has described as “average” levels, on evidence that Australia’s economy, one of few to skirt last year’s global recession, is strengthening thanks to Chinese demand for raw materials.
    New Zealand boosted its benchmark rate last week for a second straight month, and India’s central bank increased a key rate on July 27 by more than economists forecast. Malaysia has raised borrowing costs three times this year, while Korea and Thailand increased them once.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx