Australia Growth Outweighs Global Woes in RBA Rate Call: Economy

The Reserve Bank of Australia signaled confidence domestic growth would weather a “fragile” global economy in its decision this month to maintain the highest borrowing costs among major developed nations.

The central bank predicts an expansion rate over the “medium term” at around the economy’s trend pace, even as Europe’s woes cloud the outlook, according to minutes of the RBA’s board meeting Aug. 7 that were released today in Sydney. The bank kept its benchmark interest rate unchanged at 3.5 percent for a second month after the gathering.

The report underscores optimism among Australia’s policy makers that the country will withstand both turmoil from Europe’s debt crisis and a slowdown in China’s growth as officials there restrain the property market. The RBA also said Switzerland has joined central banks in buying Australia’s dollar, a trend that’s bolstered the currency and damped inflation pressures.

“The Reserve Bank won’t be cutting rates any time soon unless the global economy worsens,” said Craig James, a senior economist at Commonwealth Bank of Australia, the nation’s biggest lender, in a research note. “Policy makers seem more comfortable with domestic economic conditions but continue to watch the global situation carefully.”

Governor Glenn Stevens’s decision to extend the pause after 1.25 percentage points of reductions from November to June reflected stronger consumer purchases, a pipeline of capital spending and sustained job growth. Since the RBA last lowered rates on June 5, the currency has risen 7.7 percent.

SNB Buying

Switzerland’s central bank bought about 100 billion euros ($124 billion) over May and June, and further large purchases probably occurred in July to maintain the franc’s peg against the euro and avert inflation pressures, the RBA said.

“While some of these purchases were retained in euros, a sizable share was converted into other currencies, including a modest amount in the Australian dollar,” the minutes said.

The Australian dollar advanced to $1.0494 as of 4:18 p.m. in Sydney, from $1.0455 before the minutes. It has averaged $1.02 in the past two years, up from 72 U.S. cents for the prior decade. At the same time, the terms of trade, a measure of export prices relative to import prices, fell in June to the lowest since 2010.

‘High’ Currency

“The exchange rate had remained at a relatively high level notwithstanding the weakening in the global outlook and decline in commodity prices,” policy makers said in the minutes. The so-called Aussie has closed above parity with the U.S. dollar for all but 23 days this year, remaining above the average of 75 U.S. cents since the currency was floated in December 1983.

Elsewhere in the Asia-Pacific region, Hong Kong may report today that inflation slowed in July, according to a Bloomberg survey of economists, while India will also release consumer- price data for the same month.

Asian stocks advanced. The MSCI Asia Pacific Index gained 0.3 percent to 121.12 at 3:27 p.m. in Tokyo after earlier touching 121.42, its highest level since May 8.

In the U.S., Federal Reserve Bank of Atlanta President Dennis Lockhart is scheduled to speak on the economic outlook at a Latin American Chamber of Commerce gathering.

In Europe, Estonia and Ireland are scheduled to release producer-price inflation figures for last month. Polish data on consumer prices may show core inflation rose 0.1 percent last month, unchanged from the June pace, according to a survey of economists.

Weaker Confidence

Since Stevens’s decision to extend the rate pause, government reports painted a mixed picture of the economy: Employment and wages gained and home-loan approvals rose the most this year, while consumer confidence dropped by the most in five months.

“There were indications that consumer spending had retained some momentum in the June quarter, even though consumer sentiment remained at subdued levels,” the minutes said. “Earlier falls in interest rates and rising rental yields were likely to have increased the attractiveness of housing investment.”

Traders are pricing in a 24 percent chance that the RBA will resume rate cuts next month and lower borrowing costs by a quarter percentage point to 3.25 percent, according to data compiled by Bloomberg based on swaps trading.

“The global economic environment remained fragile, with the uncertainty emanating from the euro area affecting financial markets and potentially delaying spending by firms and households,” policy makers said in the minutes.

China’s Expansion

The RBA said there were indications that growth in China, Australia’s largest trading partner, “appeared to be stabilizing” at a more sustainable pace.

China’s economy expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years, as Europe’s debt crisis crimped exports and the government’s property crackdown cooled domestic demand. The slowdown may extend into a seventh quarter, with Deutsche Bank AG on Aug. 9 cutting its growth estimate for the three months through September to 7.5 percent from 7.9 percent.

“There were signs that investment growth had steadied and some early indications that conditions in the housing market had also improved a little in recent months,” the RBA said, referring to China.

Powering the Australian economy is the biggest resource boom since a gold rush in the 1850s. The latest bonanza -- for iron ore, coal and natural gas -- is bringing investment projects the government estimates to be worth A$500 billion ($525 billion) and contributed to an unemployment rate of 5.2 percent last month. That’s lower than 8.3 percent in the U.S. and 11.2 percent in the euro area.

Job Growth

Employment growth “in the near term was expected to remain relatively modest,” according to the RBA minutes.

Mining companies including BHP Billiton Ltd. (BHP) and Rio Tinto Group are benefiting from demand for steel and electricity in emerging economies including China and India.

“Additional large resource projects had commenced or received approval in recent months, thereby sustaining the very large stock of work in the pipeline,” the minutes said. “This had occurred despite some mining companies adopting a more cautious approach to potential, but yet to be approved, investment projects.”

Stevens is scheduled to testify to a parliamentary panel Aug. 24.

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

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