Stevens Says RBA May Raise Rate From Emergency Level

By Jacob Greber

Aug. 14 (Bloomberg) -- The Reserve Bank of Australia will have to raise the benchmark interest rate from its “emergency” level at some stage as the economy rebounds from the global recession, bank Governor Glenn Stevens said.

“There will come a time when the exceptional monetary stimulus in place at present will no longer be needed,” Stevens said in his half-yearly testimony to parliament’s economics committee in Sydney today. “It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels.”

The Australian dollar and bond yields jumped on mounting speculation the central bank may increase borrowing costs before the end of the year. A more normal level for the overnight cash rate target is “a good deal north” of the current 49-year low of 3 percent, Stevens said today.

“The bank is clearly going to hike rates soon -- year end is the most likely time,” said Adam Carr, an economist at ICAP Australia Ltd. in Sydney. Stevens points out that “the economy is more resilient than most thought it would be, global growth is leveling out and financial markets have stabilized,” he said.

The economy grew 0.4 percent in the first quarter, rebounding from its first contraction in eight years in the previous three months, as lower borrowing costs and government spending stoked domestic demand. Stevens said today it appears that gross domestic product also expanded in the second quarter.

Currency Climbs

Australia’s currency advanced to 84.65 U.S. cents at 11:20 a.m. in Sydney from 84.17 cents before the governor’s testimony began. The two-year government bond yield rose 8 basis points to 4.53 percent.

Traders have a more than 90 percent expectation that the central bank will raise the benchmark rate by half a percentage point before the end of 2009, according to interbank futures on the Sydney Futures Exchange as of 11:36 a.m. local time. A month ago, the futures implied the rate would remain unchanged.

“What we’ve got is an emergency setting” for the benchmark rate that was “put in place in anticipation that the economy would be seriously weak,” Stevens said. “As the set of risks that we think you face start to shift, at some point you have to move away from the emergency setting.”

Last week, the central bank scrapped its forecast for the economy to contract this year, instead predicting GDP will expand 0.5 percent. The bank expects growth to accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

Shallow Slowdown

“On the basis of the information to hand at present, this may well turn out to be one of the shallower recessions Australia has experienced,” Stevens said. Low interest rates risked stoking economic imbalances, he added.

The Reserve Bank board slashed the overnight cash rate target by 4.25 percentage points between September and April. As well, the government distributed A$12 billion ($10.2 billion) to households and pledged to spend A$22 billion on roads, ports, railways, schools and hospitals.

Stevens didn’t provide a timeframe for when the central bank may begin raising rates.

“It’ll be the right thing to start removing it before it’s excessive,” Stevens said in response to questions. Policy makers will remove monetary policy stimulus “in a timely fashion and when the time is right,” he added.

“The emphasis on removing the ‘emergency’ setting of the cash rate was emphasized and re-emphasized” by Stevens, said Annette Beacher, an economist at TD Securities Ltd. in Singapore.

“While coy about timing, there is no doubt that at this point the governor is looking to withdraw the extraordinary stimulus in the economy.”

Stevens declined to identify what policy makers regard as a so-called normal or neutral policy setting, though he said the benchmark rate has averaged in the 5 percent range for the last 20 years, which he characterized as the “low inflation world.”

He added that a more normal level for the key rate is “a good deal north of what the cash rate is now” and borrowing costs could go “noticeably” higher.

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