RBA’s Stevens Signals Rates May Rise Before Jobs Peak

By Jacob Greber

July 29 (Bloomberg) -- Australia’s central bank Governor Glenn Stevens may not wait for signs that unemployment has peaked before raising borrowing costs from a half-century low.

“I’ve never seen written down or heard in discussion some rule of thumb that says we wait until unemployment is peaking before we lift the cash rate,” Stevens said in Sydney yesterday. “Hopefully” policy makers will find “a suitably timely way of returning to normal when the right time for that comes.”

Australian stocks and the currency rose after Stevens also said the economy may rebound faster than the central bank forecast six months ago as consumer and business confidence surges. Traders boosted bets on the size of future interest-rate increases.

Stevens “basically said he’s not going to wait for unemployment to peak before raising rates,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. “That’s a fairly controversial thing for him to say,” and reflects the fact “the world is a much brighter place than it was three months ago.”

In the past two decades policy makers have never lifted borrowing costs at a time of rising unemployment, Robertson said.

Investors forecast the overnight cash rate target will be 112 basis points higher in a year, a Credit Suisse Group AG index based on swaps trading showed at 10:16 a.m. in Sydney. Before Stevens’ speech, they tipped 98 basis points of gains. A basis point is 0.01 percentage point.

Currency, Stocks

The Australian dollar rose yesterday after the speech to 83.38 U.S. cents, the highest in ten months. The currency traded at 82.45 cents as of 10:23 a.m. in Sydney.

Australia’s benchmark S&P/ASX 200 Index of stocks rose 0.7 percent yesterday as shares of retailers including Billabong International Ltd. jumped following Stevens’ remarks. The world’s largest publicly traded surfwear maker advanced 5.5 percent and Harvey Norman Holdings Ltd., the nation’s biggest electronics retailer, gained 1.5 percent. The index was down 0.3 percent today.

It appears “that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries,” the Reserve Bank chief told a function organized by the Australian Business Economists.

“We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago.”

‘Not Beholden’

The government forecast in May that the jobless rate, which rose to 5.8 percent in June, will hit 8.5 percent in a year. The central bank, which also forecast in May that unemployment will climb without specifying a rate, is due to revise its economic predictions next month.

Stevens is saying “that he’s not going to be beholden to one particular variable if the weight of evidence is in the other direction,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney.

“The downturn has been much less acute than feared, we’ve had a mountain of monetary and fiscal policy” and Stevens has “to make policy that’s relevant now and not based on some historical artifact.”

The governor left the benchmark overnight cash rate target at 3 percent on July 7 for a third month amid evidence a record 4.25 percentage points of cuts between September and April and A$12 billion ($9.9 billion) of government cash handouts to low and middle-income earners helped the nation skirt a recession.

‘Glass Half Full’

Signs of a rebound in Australia’s economy, which unexpectedly grew 0.4 percent in the first quarter after shrinking 0.6 percent in the fourth quarter, may prompt the central bank to revise its forecast for gross domestic product on Aug. 7.

In May, the bank predicted GDP would contract 1 percent this year before expanding 2 percent in 2010.

“It is becoming more common for Australians to see the glass as half full than as half empty,” Stevens said yesterday.

Stevens’ comment that there is no rule that the bank can’t raise rates before the unemployment rate peaks “makes us wary that he is preparing to break from convention,” said Felicity Emmett, an economist at Royal Bank of Scotland Group Plc in Sydney. “We have to be open to the Reserve Bank tightening.”

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