World Business

Oz interest rate likely to stay on hold

By Jacob Greber (China Daily)
Updated: 2010-07-08 10:21

SYDNEY - The Reserve Bank of Australia (RBA) signaled it's prepared to refrain from further interest-rate increases in coming months as signs mount that economies around the world will slow.

Central bank Governor Glenn Stevens kept the benchmark cash rate at 4.5 percent for a second month on Tuesday, even as he forecast inflation will accelerate above the top of his 2 percent to 3 percent target range. He also dropped a reference to the level of rates being appropriate for the "near term".

"The bar has been lifted on raising official interest rates," said Paul Brennan, a senior economist at Citigroup Inc in Sydney. "The fact that the bank has not responded to this change in the inflation outlook with an adjustment to monetary policy or the tone of the statement indicates that the bank is comfortable with the setting of policy."

Australia represents a global bellwether, after in October becoming the first Group of 20 member to boost borrowing costs since the height of the financial crisis. Governor Stevens is now pausing as stocks drop worldwide, China's growth moderates and Europe's governments slash spending. Australia's currency climbed as the central bank stopped short of forecasting a more pronounced global downturn.

"The RBA isn't being alarmed by the global demand backdrop," said Ray Attrill, global research director at Forecast Ltd in Sydney.

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The so-called Aussie rose against all 16 major counterparts, advancing to as much as 85.60 US cents yesterday from 83.70 cents before Stevens' statement was published. The currency traded at 84.87 at 1:56 pm on Wednesday.

Australia's central bank has increased rates six times since early October from a half-century low of 3 percent, citing an economic expansion it forecasts will almost double to 4 percent in the next two years fueled by China's demand for iron ore and energy.

The interest-rate moves helped stoke a 27 percent appreciation of the Australian dollar in the 12 months through April 30, making it the second-best performer among the world's 16 most-traded currencies. It has since pared around a third of those gains on signs the global economy is cooling.

Stevens joins central bankers in the US, Europe and parts of Asia, including Indonesia, in keeping borrowing costs unchanged to gauge whether Europe's sovereign debt crisis threatens the global economic recovery.

"Caution in financial markets has been evident in the past couple of months, driven principally by concerns about European sovereigns and banks but also by some uncertainty about the pace of future global growth," Stevens said.

Bloomberg News