Stevens Seeks `Gradual Fall' in Australian Inflation

By Jacob Greber

Sept. 8 (Bloomberg) -- The Reserve Bank of Australia seeks a ``gradual fall'' in the inflation rate and will cut borrowing costs again when there's room to move, said Governor Glenn Stevens.

``We are probably six months away from seeing clear evidence that inflation has begun to fall and, even then, it has to fall quite some distance,'' Stevens told parliament's economics committee today. ``In the near term, the question will be do we hold here or go down a bit more'' on interest rates.

The central bank lowered borrowing costs last week for the first time in almost seven years amid signs consumers are slashing spending, slowing the economy's growth to the weakest pace since 2004. Stevens said he sees no sign the economy is headed for a ``hard landing'' and noted the nation's companies are in better shape than counterparts in the U.S and Europe.

``These aren't rate-cutting comments. If we get an October cut, that will be it for the year,'' said Adam Carr, an economist at ICAP Australia Ltd. in Sydney. Stevens is ``optimistic on growth, noted that market rates have fallen considerably, and that the outlook for inflation isn't good.''

The Australian dollar traded at 83.11 U.S. cents at 10:30 a.m. in Sydney from 82.85 cents before his testimony began. The local dollar has dropped 14 percent since June 30, the worst performer of the 17 most-active currencies. The two-year government bond yield rose 1 basis point, or 0.01 percentage point, to 5.72 percent.

`Still Restrictive'

Interest rates are ``still well on the restrictive side,'' Stevens said at the half-yearly testimony in Melbourne. Last week's rate cut was because the board thought it prudent to be ``pressing on the brake not quite so vigorously as we were.''

The central bank reduced the key interest rate by a quarter point to 7 percent on Sept. 2, reversing a March increase that took the benchmark to a 12-year high.

``Rather than trying to achieve a larger fall in inflation by pushing it down more quickly, the board's strategy is to seek a gradual fall'' over a longer period, Stevens said. ``If scope continues to increase, I'm sure we'll act accordingly.''

Investors see an 81 percent chance policy makers will lower the benchmark rate at their next meeting on Oct. 7, according to a Credit Suisse Group index based on trading in interest-rate swaps at 8:56 a.m. in Sydney.

``I can't come here and pre-commit and make a forecast about what the board is going to do in coming meetings,'' Stevens said. When asked about investors pricing in expectations of a further rate cut, he replied: ``I don't have any agenda to dissuade them from that or encourage them any further.''

Inflation Forecast

Stevens is charged with keeping annual inflation between 2 percent and 3 percent on average. Consumer prices rose 4.5 percent last quarter from a year earlier.

The central bank forecast last month that the economy will expand 2 percent this year and 2.5 percent in 2009 after growing 4.3 percent in 2007. The bank expects the inflation rate to fall below 3 percent during 2010, after jumping to 5 percent in the fourth quarter of this year.

Stevens said last week's gross domestic product report gives him no reason to revise the central bank's August forecasts.

The economy grew 0.3 percent last quarter from the previous three months, the least since the fourth quarter of 2004. Household spending fell 0.1 percent, the first decline since 1993. Companies including Qantas Airways Ltd. and Ford Motor Co. are firing workers in Australia.

Slower household spending is being offset by a mining boom stoked by China's demand for iron ore and coal. Australia's terms of trade, a measure of export income, surged 13.1 percent in the second quarter, the biggest increase in 35 years, Treasurer Wayne Swan said last week.

Shipments of natural resources are helping Australia's A$1 trillion ($826 billion) economy outpace other developed nations, which are being buffeted by the global credit squeeze that has stifled household borrowing and company expansion.

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