World Business

Australia keeps interest rate unchanged at 4.5%

By Jacob Greber (China Daily)
Updated: 2010-06-02 09:53

Glenn Stevens, governor of the Reserve Bank of Australia, said the economies of Europe have been relatively weak, triggering falls in shares, bond rates and commodity prices around the globe. Eric Taylor/ Bloomberg News

SYDNEY - 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 on Tuesday. 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".

The 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 US cents at 2:55 pm in Sydney from 83.68 cents just before the decision was announced. The two-year government bond yield was unchanged at 4.37 percent.

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 US 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 policymakers moved to prevent a potential Greek debt default.

European crisis

Stevens said on Monday 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 on Wednesday 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.

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Central bankers are holding fire amid concerns the global recovery may be cooling.

"Interest rates in Australia are certainly on hold, and you are left asking the question 'how long is the near-term?'," said Scott Haslem, chief economist at UBS AG in Sydney. "Strangely absent from Tuesday'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.

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.

Bloomberg News