RBA Saw Scope to Cut Australian Rates on Unemployment

April 21 (Bloomberg) -- Australia’s central bank policy makers cut borrowing costs two weeks ago because rising unemployment and weaker-than-expected domestic demand increases the likelihood inflation will slow.

“The effect of recent international and domestic information had been that the near-term outlook for demand and output in Australia was now weaker than expected,” Reserve Bank policy makers said, according to minutes of their April 7 meeting, released in Sydney today.

Prime Minister Kevin Rudd said yesterday for the first time that a recession in Australia is inevitable amid a downturn in global growth that is eroding demand for natural resources from the world’s biggest shipper of coal and iron ore. Central bank Governor Glenn Stevens and his board cut the benchmark rate by a quarter-point to a 49-year low of 3 percent this month, the sixth reduction since September.

“A period of low capacity utilization and a weaker labor market was seen as increasing the likelihood of a decline in inflation over the medium term,” the minutes said.

“As such, members saw scope for a modest reduction in the cash rate.”

Joblessness Rises

Australian unemployment jumped in March by the most since the economy was last in a recession in 1991. Miners including Rio Tinto Group and Iluka Resources Ltd. are among companies firing workers. The jobless rate rose to 5.7 percent from 5.2 percent.

Higher unemployment is easing pressure on wages, which surged in the last five years as a mining boom triggered a shortage of skilled labor that helped to push the consumer price index above the central bank’s target range of 2 percent to 3 percent.

The Australian dollar traded at 69.98 U.S. cents as of 11:35 a.m., little changed from before the minutes were released. The currency dropped yesterday by the most in more than two months on concern U.S. banking losses will deepen, reducing investors’ appetite for risk.

“Conditions in the labor market continued to soften,” the minutes said. “Further falls in employment and rises in unemployment were expected,” and “wage growth was expected to moderate in the period ahead.”

Economy Shrinking

Policy makers have reduced the overnight cash rate target by 4.25 percentage points since September to spur an economy that unexpectedly shrank in the fourth quarter by 0.5 percent, the first contraction in eight years.

“Members were informed that there had been further downward revisions to staff forecasts for growth and inflation,” the minutes said. “Gross domestic product was expected to fall in 2009, but increase again in 2010.”

Economic reports released for the March quarter “suggested another weak outcome for demand and output, although members noted that consumption had held up relatively well,” after the government handed out cash grants to pensioners and families.

Since October, the government has announced almost A$90 billion ($63 billion) in grants, spending and bond market assistance.

Government Aid

The central bank’s interest-rate cuts, “together with the substantial fiscal measures, would support demand and help to foster economic recovery in due course,” today’s minutes said.

“A recovery in demand was likely towards the end of the year.”

Prime Minister Rudd, whose government will release its budget for the next fiscal year on May 12, said yesterday that the worst global recession in 75 years “means it’s inevitable that Australia too will be dragged into recession.”

“Seven of Australia’s largest trading partners are already in recession,” Rudd said. “The challenge for the government is to cushion the impact of the recession on business and jobs.”

Traders forecast a 58 percent chance of a quarter-point reduction in the central bank’s overnight cash rate target when policy makers meet next on May 5, a Credit Suisse Index based on swaps trading showed.