20 Oct 2009
Oct. 20 (Bloomberg) -- Australia's central bank said it may be "imprudent" to keep interest rates near a half-century low, underscoring Governor Glenn Stevens's determination to increase borrowing costs further to avoid a surge in inflation.A "very expansionary setting of policy was no longer necessary, and possibly imprudent," officials said in minutes of their Oct. 6 meeting, released today in Sydney. The bank said gains in the nation's dollar, the best-performing this month of the 16 most-traded currencies, "may help contain inflation."
Stevens unexpectedly raised the benchmark rate a quarter point to 3.25 percent, becoming the first Group of 20 central banker to increase borrowing costs. Holding rates at "very low levels" could threaten the bank's target of keeping inflation between 2 percent and 3 percent, today's minutes said.
"The insertion of one word in today's minutes -- ‘imprudent' -- slapped us in the face," said Stephen Walters, chief economist at J.P. Morgan Chase & Co. "If the prevailing 3 percent cash rate two weeks ago stood a reasonable chance of being ‘imprudent,' so does today's 3.25 percent."
After today's minutes, Walters changed his forecast for no change at the central bank's next rate decision on Nov. 3 to tip a quarter-point increase. Walters had been the only one of 22 economists surveyed last week by Bloomberg not tipping a move.
The Australian dollar jumped to 93.11 U.S. cents immediately after the minutes were released, from 92.76 cents earlier. It traded at 92.87 cents at 3:02 p.m. in Sydney, taking this month's gain to 5.2 percent.
Yields on two-year government notes rose to 4.88 percent from 4.84 percent before slipping back to 4.84 percent.
Inflation Threat
"Underlying inflation was still, on the latest data, above the target and, while the current forecasts suggested it would fall in the coming year, the expected trough in inflation was significantly higher than earlier thought," the bank said.
Annual core inflation was 4.2 percent in the three months through June, a report showed on July 22. Third-quarter inflation figures will be published on Oct. 28.
Investors are certain Stevens will raise the benchmark rate by at least another quarter point on Nov. 3, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. Chances of a half-point increase next month were 18 percent, the futures showed at 2:26 p.m. today, down from 26 percent prior to today's minutes.
"I didn't get the sense that the Reserve Bank was toying with a 50 basis point increase in upcoming meetings," said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. "On the contrary, my read is that there was reasonable debate about whether to hike in October at all."
‘Close' Call
While policy makers discussed the risk of acting prematurely, they also said "very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."
Stevens said last week that experience "counsels against" an approach where policy makers who cut rates rapidly in response to a threat become "too timid to lessen that stimulus in a timely way when the threat has passed."
The nation's economy "had for some time been noticeably stronger than had earlier been expected," today's minutes said.
Gross domestic product rose 1 percent in the first half of this year as consumers increased spending after the government distributed more than A$20 billion ($19 billion) in cash to households and the central bank slashed borrowing costs by a record 4.25 percentage points between September last year and April.
Consumers Confident
Recent reports show consumer confidence rose this month to the highest level in more than two years, retail sales gained and the jobless rate unexpectedly fell to 5.7 percent in September from 5.8 percent in August, the first drop in five months.
Households have used the central bank's earlier cuts to borrowing costs to pay down their loan balances ahead of schedule, today's minutes said. "This would reduce the vulnerability of that part of the household sector to rising mortgage rates."
Policy makers also discussed the outlook for the nation's mining sector, and the impact of this month's decision by Chevron Corp. to build its Gorgon A$43 billion liquefied natural gas project in Western Australia.
Higher Currency
Increased investment in mining "would be positive for the economy as a whole, but would present challenges for some sectors as it would require a significant reallocation of resources in the economy," today's minutes said.
"Members also noted that a sizeable gap had opened up between the performance of Australia and other developed economies, and the board had to be mindful of local conditions in setting policy."
Australia's currency continued to rise over the past month, reaching a 14-month high against the U.S. dollar, the minutes noted. The appreciation in the exchange rate would "help contain inflation."
The Reserve Bank is "probably one of the few central banks in the world that's not resisting their currency appreciating," because it's helping contain inflation, said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney.
