Australia Keeps Rate at 4.5% to Gauge Market Turmoil

Australia’s central bank left its benchmark interest rate unchanged and signaled it may keep borrowing costs steady in coming months as it assesses the impact of the most aggressive rate increases in the Group of 20.

Governor Glenn Stevens and his policy-setting board kept the overnight cash rate target at 4.5 percent, the Reserve Bank of Australia said in a statement in Sydney today. The decision was predicted by all 22 economists surveyed by Bloomberg News.

The Australian dollar was little changed after the central bank, which has raised borrowing costs six times since early October, said its monetary policy setting was “appropriate for the near term.” Today’s decision may be echoed across Asia this week as central banks from Indonesia to Thailand and the Philippines are forecast to hold off on rate increases as they gauge fallout from Europe’s debt crisis.

“They’re not going to be looking to hike interest rates for the next couple of months,” said Ben Dinte, an economist at Macquarie Group Ltd. in Sydney. “But at the same time they’re still commenting on the terms of trade and inflation. While they’re on hold, they’re not ruling out further increases later this year or early 2011.”

The Australian dollar traded at 83.90 U.S. cents at 2:55 p.m. in Sydney from 83.68 cents just before the decision was announced. The two-year government bond yield was unchanged at 4.37 percent.

European Crisis

Stevens increased rates from a half-century low of 3 percent in early October, citing surging Asian demand for Australian commodities and a jobs boom that has pushed down unemployment to around half that of the U.S. and Europe.

The interest-rate moves helped stoke a 27 percent gain in Australia’s dollar in the 12 months through April 30, making it the second-best performer among the world’s 16 most-traded currencies. The currency has since pared around half of those gains as European Union policy makers moved to prevent a potential Greek debt default.

Stevens said today that while growth in Asia “has continued to be quite strong,” the economies of Europe have been “relatively weak,” triggering falls in shares, bond rates and commodity prices around the globe.

“The effects of these various factors on the world economy will need to remain under review,” Stevens said.

Thailand’s central bank will probably maintain its benchmark rate at 1.25 percent tomorrow and Bank Indonesia may keep borrowing costs at 6.5 percent on June 4, according to separate Bloomberg surveys. The key rate in the Philippines is forecast to be held at 4 percent on June 3.

Holding Fire

Central bankers are holding fire amid concerns the global recovery may be cooling. Chinese manufacturing expanded at a slower pace in May, as that country’s Purchasing Managers’ Index fell to 53.9 from 55.7 in April, a report showed today. The Institute for Supply Management’s U.S. manufacturing index will today show growth slowed last month, analysts predict.

Interest rates in Australia are “certainly on hold, and you’re left asking the question ‘how long is the near-term?’,” said Scott Haslem, chief economist at UBS AG in Sydney. “Strangely absent from today’s statement was a discussion about the domestic economy,” where data has been “a bit softer” in recent weeks, he said.

Australia’s economy, which skirted last year’s global recession and surged in the final three months of 2009, is showing signs of slowing as higher borrowing costs and the end of government stimulus weigh on domestic demand.

Bank Lending

Bank lending rose in April at the weakest pace in five months, house-price growth slowed to a 16-month low, and building approvals fell for the third month this year, reports published today and yesterday showed.

Manufacturing growth weakened last month from the fastest pace in almost eight years, the Australian Industry Group and PricewaterhouseCoopers said in a survey released in Canberra today.

Gross domestic product growth slowed to 0.6 percent last quarter from 0.9 percent in the previous three months, analysts predicted in a Bloomberg survey late last week. The figures will be published at 11:30 a.m. in Sydney tomorrow.

Virgin Blue Holdings Ltd., Australia’s No. 2 carrier, cut its profit forecast last week on a “rapid deterioration” in leisure travel and rising industrywide capacity.

The nation’s property market, which surged 20 percent in the year to March 31, is also showing signs of weakening.

Loans provided by banks and other finance companies gained 0.2 percent in April from March, the smallest gain since November, a Reserve Bank report showed yesterday. Lending to home buyers rose 0.5 percent after gaining 0.7 percent in March.

Housing Market

Dwelling price growth slumped in Australia’s eight largest cities to 0.3 percent in April, after gaining around 1 percent a month since the start of 2009, according to a report by real estate monitoring company RP-Data Rismark.

That follows reports last month showing home-loan approvals dropped 25 percent in the six months through March to the lowest level in nine years.

The central bank has increased its benchmark rate by 150 basis points since early October, adding about A$3,600 ($3,035) a year to repayments on an average A$300,000 mortgage.

Those moves have pushed rates paid by most borrowers to “around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago,” Stevens said today.

Australian Treasurer Wayne Swan said the central bank’s decision to keep rates unchanged today would be a “welcome relief” to families and businesses.

Traders are betting there is no chance of a quarter-point rate increase at central bank monthly meetings until February, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is also a 12 percent chance of a rate cut in July, the futures showed at 2:58 p.m.

(Source:www.bloomberg.com)