Australia May Cut Rate for First Time Since 2001, Signal More

By Jacob Greber

Sept. 2 (Bloomberg) -- Australia's central bank will probably cut its benchmark interest rate for the first time in seven years and may signal further reductions in coming months as the nation's 17-year economic expansion slows.

Governor Glenn Stevens will lower the overnight cash rate target by a quarter point to 7 percent today, according to 22 of 23 economists surveyed by Bloomberg News. The decision will be announced at 2:30 p.m. in Sydney.

The biggest slump in retail sales in six years, tumbling business confidence and evidence of slower jobs growth prompted Stevens to say last month that he may soon cut rates to avoid a ``deeper and more persistent'' economic slowdown. Gross domestic product expanded by the least in two years in the June quarter, economists surveyed ahead of a Sept. 3 report forecast.

``The Reserve Bank looks set to cut by a quarter point, and will probably cut again in October,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``The central bank has overseen a rise in interest rates to levels that have killed the inclination to expand for many households and businesses.''

The bank has added 300 basis points to the benchmark rate since December 2001, when it was 4.25 percent.

Policy makers last raised borrowing costs in March, for a second straight month, to curb consumer prices that jumped 4.5 percent in the second quarter. Stevens aims to keep annual inflation between 2 percent and 3 percent on average.

Economic Growth

Since the bank's last meeting on Aug. 5, reports have shown new home sales fell to a two-year low and lending to consumers and businesses rose at the slowest annual pace since 2002. Companies including Qantas Airways Ltd., Ford Motor Co. and Starbucks Corp. have announced job cuts.

The government will publish a report tomorrow at 11:30 a.m. in Sydney showing second-quarter gross domestic product rose 0.4 percent from the previous three months, when it expanded 0.6 percent, according to the median estimate of 23 economists surveyed by Bloomberg.

``We expect a relatively guarded statement from the Reserve Bank that recognizes the slowdown in growth, and the still persistent concerns about inflation and the present stimulus from commodity prices,'' said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney.

Stevens, along with his counterparts in Europe, Asia and the U.S., faces the challenge of balancing slowing household spending, which accounts for about 60 percent of Australia's $1 trillion economy, with the threat that inflation will accelerate amid rising energy costs and a shortage of skilled labor.

Exports to China

``The scarcity of labor in Australia is now acute'' and it will ``have a negative impact on BHP Billiton Ltd.,'' Don Argus, chairman of the world's biggest mining company, said at a business forum in Canberra yesterday.

Surging demand from China will increase Australia's export income by 20 percent this year, the central bank estimates, offsetting slower domestic growth and boosting profits at miners including BHP Billiton. A report showed yesterday that company profits surged in the second quarter by the most in more than seven years.

``I don't think the Reserve Bank will do another two or three rate cuts after today,'' said Peter Pontikis, an economist at Suncorp-Metway Ltd. in Brisbane. ``That's crazy. Inflation is way too high. And they're cutting six months after their last hike, which is a little bit too soon.''

Stevens has signaled that one reason for lowering borrowing costs is to unwind the impact of higher mortgage rates on households.

Mortgage Repayments

The nation's five largest lenders, including Commonwealth Bank of Australia Ltd., have added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank has raised its benchmark by a total of 50 basis points in that time.

The increases added A$250 ($213) to monthly repayments on an average A$250,000 home loan, according to the Real Estate Institute. A report yesterday showed households spent 39.8 percent of their incomes on mortgage payments in the June quarter, the most in the 22 years the institute has measured affordability.

``The Reserve Bank has overshot the mark with interest rates,'' Michael Costa, treasurer of New South Wales state, told Sydney's Daily Telegraph last week. ``There is no doubt that monetary policy, interest rate rises, has hurt the New South Wales economy,'' Australia's biggest, he said.

Higher borrowing costs are forcing consumers to cut spending. Retail sales fell by the most in six years in June, eroding sales growth at companies including Harvey Norman Holdings Ltd., Australia's largest furniture and electronics retailer.

``If rates drop by between a quarter and half a percentage point in the next few months, it will help us, but it won't take us back to where we were last year,'' Chairman Gerry Harvey said in an interview on Aug. 29.

Investors expect Stevens will cut the benchmark borrowing cost by at least one percentage point in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps.

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