Australia Central Bank Saw Need for Expansionary Rate

By Jacob Greber

Dec. 16 (Bloomberg) -- The Australian central bank’s one percentage point interest-rate cut this month puts monetary policy at an “expansionary setting” to stoke business and consumer confidence, policy makers said.

The rate cut had to be “large enough to have a noticeable effect on financing decisions of lenders and borrowers,” the Reserve Bank of Australia said in minutes of its Dec. 2 meeting, released in Sydney today. It also trimmed its forecast for inflation in the 12 months through June 2009 to 2.5 percent from a November prediction of 3 percent.

The bank board, led by Governor Glenn Stevens who proposed December’s “substantial reduction,” reduced the overnight cash rate target to a six-year low of 4.25 percent, extending the most aggressive round of policy easing since a recession in 1991. The bigger-than-forecast cut also was warranted because the board isn’t scheduled to meet in January, the minutes said.

“We get the sense that they would prefer to pause for breath amid some early signs that policy is beginning to have the desired impact,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney.

Australia’s dollar rose to 66.93 U.S. cents at 12:17 p.m. in Sydney from 66.73 cents before the minutes were released. The two-year government bond yield was unchanged at 2.89 percent.

“The size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer” months of December and January, the bank said.

Significant Stimulus

The A$1 trillion ($670 billion) economy grew 0.1 percent in the third quarter, the weakest pace in eight years as consumer spending slumped and house prices fell.

Three percentage points of reductions in the overnight cash rate target since September, as well as the Australian dollar’s “large depreciation” in recent months, “amounted to significant stimulus that would support demand over the year ahead,” policy makers said. The local currency has fallen 24 percent against the U.S. dollar this year.

Stevens and his board are scheduled to hold their next meeting on Feb. 3 and will reduce the benchmark rate by a further half point, according to 16 of 21 economists surveyed by Bloomberg News late last week.

The minutes also suggest policy makers see scope for further reductions because inflation is likely to slow “more quickly in the short term as a result of the recent falls in petrol prices.”

Inflation Target

“Global disinflationary forces were likely to assist in this regard, though members acknowledged that the depreciation of the exchange rate meant the decline to the target” range of 2 percent to 3 percent “could take longer than would otherwise have been the case.”

The Reserve Bank is “comfortable with its 100 basis point cut and that they don’t have to come back over the summer and do more work,” said Hayden Atkins, an economist at Macquarie Group Ltd. in Sydney. Still, the outlook for Australia’s economy “can all change quite quickly.”

Reports published since the board’s meeting two weeks ago support the view that Australia may follow the U.S., Japan and Europe into a recession.

Business confidence fell to a record low in November, and the jobless rate climbed in November to the highest in a year, rising to 4.4 percent from a three-decade low of 3.9 percent in February.

Building Slumps

A separate government report published today showed the number of dwellings that builders commenced plunged 10.7 percent in the third quarter from the previous three months, the biggest slump in eight years.

Miner Rio Tinto Group and Australia & New Zealand Banking Group Ltd. are among companies that have announced plans to fire workers amid a deepening global economic slowdown.

Waning global demand for commodities, especially from China for iron ore, means businesses will pare investment, pushing Australia’s economy into a recession during the six months through March 2009, Goldman Sachs Group Inc. economist Tim Toohey said on Dec. 11. Gross domestic product will expand 0.5 percent in 2009, the weakest annual pace since 1991, Toohey added.

“Recent data indicated that a significant moderation in demand and activity had been occurring” ahead of this month’s meeting, today’s minutes said.

“With confidence affected by the financial turbulence and a decline in the terms of trade now under way, members thought that more cautious behavior by both households and businesses would result in private demand remaining subdued in the near term.”

Government Spending

Policy makers agreed that it was appropriate to shift monetary policy settings from a “roughly neutral position to one that was clearly expansionary,” the minutes showed.

To help stoke spending that accounts for about 60 percent of the economy, the government started distributing A$8.9 billion in handouts last week to pensioners and families and encouraged them to spend the cash to support the flagging economy.

Interest-rate cuts and extra government spending will provide “significant” support for the economy in 2009 amid a global slowdown, Governor Stevens said on Dec. 9. “There is scope to do more with macroeconomic policy settings if needed,” he added.

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