“While the financial situation in Europe remained fragile, the likelihood of an extremely bad outcome seemed to have diminished somewhat,” the minutes released today by the Sydney- based Reserve Bank of Australia showed. “With growth expected to be close to trend and inflation consistent with the target, the board considered that this setting was appropriate for the overall macroeconomic outlook.”
The minutes echo the RBA’s statement after this month’s policy meeting where it unexpectedly held rates at 4.25 percent after two quarter-percentage-point reductions late last year. RBA Governor Glenn Stevens and his board noted in today’s minutes that the cuts “had been passed through to most lending rates in the economy, which were now around average levels.”
Since the meeting, Australia’s four biggest banks raised their standard variable mortgage rates independently from the RBA, drawing criticism from the government. The central bank noted in the minutes that competition for deposits, recent covered bond sales, and the cost of swapping funds raised offshore into Australian dollars had added to the price lenders paid to raise money.
‘Narrowed the Difference’
“Collectively, these developments had increased banks’ overall cost of funding relative to the cash rate and had narrowed the difference between banks’ lending rates and funding costs,” policy makers said in the minutes.
Commonwealth Bank of Australia increased the interest on a variable rate home loan by 10 basis points to 7.41 percent last week, followed by National Australia Bank Ltd., which added 9 basis points to 7.31 percent. Westpac Banking Corp. boosted the cost by 10 basis points to 7.46 percent on Feb. 10, after Australia & New Zealand Banking Group Ltd. added 6 basis points to 7.36 percent. ANZ Bank and Westpac cited higher debt premiums and competition for deposits.
The central bank today reiterated its comments at the Feb. 7 meeting that policy makers “judged that if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy.”
The RBA aims to keep inflation between 2 percent and 3 percent on average and policy makers noted that recent data confirmed that core inflation is now in the mid-point of the target range.
Rates on Hold
Today’s minutes suggest the central bank is “on hold for some time,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker. “Even if you’re pessimistic, it’s going to take time for that to be reflected in the data given its current momentum.”
The improvement in the global and domestic economies prompted investors to pare bets on a rate cut next month to 32 percent, according to a Credit Suisse Group AG Index.
This month’s rate pause spurred the currency, which reached a six-month high of $1.0845 following the decision and has appreciated about 5 percent this year. The local dollar maintained declines after the release of the minutes, trading at $1.0730 as of 12:09 p.m., down 0.3 percent from yesterday.
Carmakers Hurt
The currency’s strength is hurting Toyota Motor Corp.’s Australian division, the country’s largest car exporter, which announced last month it would cut more than a 10th of the employees at its assembly plant after a 21 percent decline in 2011 production. General Motors Co.’s local unit has also announced job cuts.
Australia recorded its worst annual jobs growth in 19 years in 2011 as Europe’s escalating debt crisis damaged confidence. The jobs market has shown signs of revival this year as employers added the most workers in 14 months in January and the unemployment rate unexpectedly declined to 5.1 percent.
“Members observed that it appeared that additional demand for labor had been met largely through existing employees working longer hours over the past year, rather than through an increase in hiring,” the minutes showed.
Australia’s economy is being driven by China, the nation’s biggest trading partner, which is buying up iron ore, coal and natural gas as millions of people in the world’s most populous nation move to urban centers.
‘Quite Robust’
“Growth in China had moderated as intended, but on most indicators had remained quite robust through the second half of 2011,” policy makers said in the minutes.
Resource projects in Australia valued at A$456 billion ($490 billion) are spurring companies such as BHP Billiton Ltd. to increase hiring and helping cushion a slump in manufacturing and services hit by a stronger local currency.
More than 25,000 new workers will be needed to complete mining, natural gas and transportation projects in Queensland by late-2012, according to the industry-funded group Construction Skills Queensland.
“Australia’s terms of trade reached a record high in the September quarter, and were estimated to have declined 7 percent in the December quarter,” the central bank said, referring to a measure of export prices relative to import prices. It said most commodity prices had risen over the past two months, “consistent with the more positive tone in financial markets.”
Growth Forecast
The RBA this month lowered its forecasts for growth and inflation. It sees average growth of 3.5 percent in 2012, down from its Nov. 4 estimate of 4 percent. Consumer prices will rise 3 percent in the year through to the fourth quarter, less than a previous prediction of 3.25 percent, the central bank said, while underlying inflation is predicted to be unchanged at 2.75 percent.
In an effort to contain the region’s debt crisis, the European Central Bank is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral.
“Global economic and financial market developments had been somewhat more positive over the past month or so,” policy makers said in today’s minutes. “Whereas the situation had been looking quite negative in early December, recent actions by the European Central Bank and euro-area governments had boosted confidence.”
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
http://www.bloomberg.com/news/2012-02-21/rba-says-rates-appropriate-with-scope-for-easing-minutes-show.html
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