RBA's Stevens Says Stronger Currency Contains Inflation, Rates Appropriate
Australian central bank Governor Glenn Stevens reinforced investors’ view that the nations’ benchmark interest rate is appropriate in the near term, as a stronger local dollar helps contain inflation.
“Over the coming year, we think that inflation will be pretty close to where it is now, consistent with the target” of 2 percent to 3 percent, Stevens told the House of Representatives Committee on Economics in Canberra today. Regarding a rate move, he said that “there’s unlikely to be anything from us imminently.”
The Australian dollar fell after his comments bolstered expectations that the Reserve Bank of Australia will continue monitoring figures on prices before raising interest rates again. Less than two weeks before the RBA’s next policy meeting, Stevens indicated that with unemployment hovering around 5 percent, the pace of wage growth wasn’t “alarming.”
“This is consistent with the idea that there will be no near-term move and they will reassess in February and March next year,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “That said, the fact that RBA is talking more about medium-term upside risks to inflation should leave us in no doubt where rates are going.”
Carr said he is predicting two 25 basis point increases in the overnight cash rate target in the first half of 2011.
Traders are betting there’s no chance of a quarter percentage point increase in the central bank’s benchmark rate to 5 percent on Dec. 7, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. Swaps traders are betting the RBA will raise benchmark borrowing costs by 34 basis points within a year, according to an index compiled by Credit Suisse Group AG.
Stevens, 52, said today that expectations on the outlook for the cash rate weren’t “unreasonable.”
The biggest mining investment boom in a century is stoking Australia’s economy as companies including BG Group Plc increase hiring to meet demand from China.
BG Group, based in Reading, U.K., said last month it will begin work on a $15 billion liquefied natural gas venture in Queensland, generating 5,000 construction jobs. BG, Chevron Corp., Royal Dutch Shell Plc and ConocoPhillips are among energy companies investing about A$200 billion in proposed LNG projects in Australia.
Speaking on the global economic outlook, Stevens said today he expects “periodic flare-ups of anxiety in Europe” as the continent works its way through a debt crisis, while the U.S.’s recovery will probably be “ok” and avoid another recession. Asia is poised to lead the world as the “center of gravity” shifts to the region, the governor said.
The RBA on Nov. 2 ended a five-month pause in raising interest rates as it seeks to contain an expected gain in consumer prices. Wages rose last quarter by the most in almost two years as growth of salaries in private industry outpaced government pay gains for the first time since the height of the global financial crisis.
“Stevens’ comments highlight that the risk remains on the side of higher rather than lower inflation,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. “The hike, plus the additional moves by the banks and the stronger Australian dollar, mean that the policy setting is about right for the period ahead.”
Stevens boosted borrowing costs this month by a quarter percentage point to 4.75 percent as mining investment, job growth and overseas demand propel the economy. He has increased the benchmark lending rate seven times since October 2009.
That contrasts with the U.S. Federal Reserve’s policy of a benchmark rate near zero since December 2008. The divergence has made the local dollar the second-best performer among 16 major currencies this year, with an 8.7 percent gain against the U.S. dollar.
Australia’s currency traded at 97.51 U.S. cents as of 1:09 p.m. in Sydney from 98.08 cents in New York yesterday and 98.66 cents on Nov. 19.
Stevens said the Australian dollar’s rise was helping contain inflation pressures and that the increase “usually takes some time to flow through fully.”
Speaking about monetary policy, Stevens said today that “overall, and also taking account of the exchange rate, which has risen substantially this year, we judge this to be the appropriate setting for the period ahead.”
The amount of spare capacity in the nation’s economy is “pretty modest” and “the pace of overall wage growth in the economy is gradually increasing,” the governor said. Growth in labor costs “is no longer declining but rising,” he said.
Employment in Australia rose by 29,700 jobs in October from September, a government report this month showed, almost 50 percent more than the median forecast for a 20,000 increase in a Bloomberg News survey.
“There’s a bit more scope for labor demand to rise than you might think just by looking at the official unemployment rate,” Stevens said. Inflation is near the midpoint of the RBA’s inflation target range of 2 percent to 3 percent, he said.
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