RBA Says Pace of Australia Rate Rises ‘Open Question’

Nov. 17 (Bloomberg) -- Australia’s central bank says the pace of interest-rate increases is an “open question” as it balances the risk of keeping borrowing costs too low against an economy that may cool as government stimulus abates.

“If economic conditions evolved as expected, further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question,” officials said in minutes released today in Sydney of their Nov. 3 meeting, at which they raised the overnight cash rate target to 3.5 percent.

Signs the economy is rebounding from the global recession with “less spare capacity than earlier thought likely,” will prompt Reserve Bank Governor Glenn Stevens to raise the rate on Dec. 1 by another quarter percentage point for a record third month, say analysts surveyed by Bloomberg. Still, a report showing consumer confidence fell this month may prompt policy makers to wait until next year.

“In considering the pace of that adjustment, members were conscious of balancing risks,” the minutes said. “On the one hand, business and consumer confidence could prove fragile, and economic activity at home and abroad might slow more than expected as the effects of stimulus measures faded.”

The rising Australian currency will also “constrain output and dampen inflationary pressure,” while credit conditions for some borrowers “remained quite difficult,” the bank said.

Market Reaction

The Australian dollar traded at 93.53 U.S. cents at 11:36 a.m. in Sydney from 93.76 cents before the minutes were released. The local currency has gained 33 percent this year against its U.S. counterpart. The two-year government bond yield fell 2 basis points, or 0.02 percentage point, to 4.56 percent.

“On the other hand, a lengthy period with interest rates at a very low level carried its own risk, particularly once the threat of serious economic weakness had passed,” policy makers said.

Governor Stevens raised the overnight cash rate target by a quarter point in October and this month, from a half-century low of 3 percent, becoming the first policy maker in the world to boost borrowing costs twice this year.

By contrast, the U.S. Federal Reserve and Bank of Japan have kept borrowing costs at close to zero, while the European Central Bank and Bank of England have held rates at record lows.

Rate Expectations

Investors are betting there is a 72 percent chance Stevens will increase the key rate by another quarter point in two weeks, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 7:20 a.m. That would be the first time in history the bank has raised borrowing costs at three successive meetings.

Still, there are signs the impact from A$20 billion ($19 billion) in cash handouts to households from Prime Minister Kevin Rudd’s government may be waning. Consumer confidence fell this month for the first time since May, a Westpac Banking Corp. survey showed on Nov. 11.

Liaison with shopkeepers “pointed to retailers experiencing mixed conditions in September and October, although the broader perspective was that spending appeared to have held up reasonably well given that the earlier boost from the payments to households was fading,” today’s minutes said.

Also, “members noted the weak outlook for construction of apartments, in contrast to the current strong population growth.”

Underlying inflation and gains in the annual consumer price index were expected “to be consistent” with the central bank’s target range of between 2 percent and 3 percent, the minutes said.

Economic Forecasts

The central bank this month predicted the nation’s economy will expand at more than three times the pace it forecast in August. Gross domestic product will rise 1.75 percent this year and 3.25 percent in 2010, the bank said on Nov. 6. Three months earlier, it forecast gains of 0.5 percent and 2.25 percent respectively.

The economy will continue its expansion in 2011 and 2012 as companies boost investment in resources, including Western Australia’s A$43 billion Gorgon liquefied natural gas project owned by Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc, the bank predicted earlier this month.

Conditions in the global and Australian economies “were significantly better than had been expected earlier in the year” when the board cut the rate to 3 percent, today’s minutes said.

“The growth outlook for the next few years had improved,” they added. “The board therefore concluded that it remained prudent, over time, gradually to reduce the degree of monetary accommodation.”