Australian Central Bank Says It May Cut Rates `Soon'

By Jacob Greber
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Aug. 19 (Bloomberg) -- Australia's central bank may need to cut borrowing costs soon to avoid the risk of a ``deeper and more persistent'' slowing in the economy.

``A case could be made for an early reduction in the cash rate,'' members of the bank's board said in minutes of their Aug. 5 meeting, released in Sydney today.

Reserve Bank of Australia policy makers including Governor Glenn Stevens have signaled in recent weeks that they will cut the benchmark lending rate from a 12-year high of 7.25 percent as the economy slows enough to cool inflation. Board members were ``conscious that financial conditions were clearly quite tight,'' the minutes said.

``Less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase,'' board members said.

The Australian dollar traded at 86.51 U.S. cents at 11:32 a.m. in Sydney from 86.55 cents before the minutes were released. The two-year government bond yield fell 1 basis point, or 0.01 percentage point, to 5.75 percent.

The Reserve Bank expects ``low'' economic growth in the second and third quarters. Second-quarter gross domestic product figures will be released next month.

``Given the slower trend in demand, scope to move towards a less restrictive setting of monetary policy was judged to be increasing,'' today's minutes said, reiterating what the bank said on Aug. 5 when it left borrowing costs unchanged for a fifth month.

Borrowing Costs

Stevens and his board last raised the benchmark rate in March, adding to increases in February, November and last August that boosted the overnight cash rate target by a total of 1 percentage point. The nation's five largest banks have increased home-loan rates by an average of 1.55 percentage points in that period as the global credit squeeze increased the cost of funding.

Reports since the August bank meeting have shown Australian business confidence held in July at the lowest level since the 2001 terrorist attacks in the U.S., home-loan approvals fell to a four-year low in June, and employers hired fewer workers.

``Given there had been a significant change in borrowing behavior, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted,'' today's minutes said.

Board members decided to keep the benchmark rate unchanged two weeks ago because ``a lengthy period of inflation above the target was occurring, with attendant risk that this would begin to affect wage setting. If that occurred, the cost of reducing inflation later would be greater.''

Inflation Risk

``Policy had to take account of this risk,'' the minutes said.

Consumer prices will rise 5 percent in the fourth quarter, after climbing 4.5 percent in the second quarter, the central bank forecast last week. It expects the inflation rate to fall below 3 percent during 2010.

``Clear evidence of that decline beginning, however, was unlikely to be seen for a while yet,'' today's minutes said.

The bank aims to keep inflation between 2 percent and 3 percent on average.

The Reserve Bank will lower the overnight cash rate target on Sept. 2, according to 18 of 25 economists surveyed by Bloomberg News. Thirteen expect a cut of 25 basis points and five forecast 50 basis points.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net