Australia Keeps Key Interest Rate Unchanged to Gauge Recovery

By Jacob Greber

Sept. 1 (Bloomberg) -- Australia’s central bank kept interest rates unchanged for a fifth month to spur an economy that probably cooled in the second quarter.

Reserve Bank Governor Glenn Stevens left the overnight cash rate target at 3 percent in Sydney today, as forecast by all 17 economists surveyed by Bloomberg News.

Australia’s currency and bond yields fell as traders pared bets rates could be raised as soon as next month after Stevens said “the present accommodative setting of monetary policy remains appropriate for the time being.” Economic growth slowed in the second quarter as exports and inventories slumped, a report will show tomorrow, according to a survey of analysts.

“They aren’t in a rush” to raise borrowing costs, said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “They want to wait and see whether the economy holds up. That rules out October for a hike.”

The Australian dollar fell to 84.18 U.S. cents at 2:46 p.m. in Sydney from 84.40 cents just before the decision was announced. The two-year government bond yield slumped 7 basis points to 4.48 percent. A basis point is 0.01 percentage point.

While the bank’s record 4.25 percentage points of interest- rate cuts between September and April prompted consumers and businesses to bring forward spending plans, “in those areas demand may soften in the near term,” Stevens said today.

“Some types of capital spending are also likely to be held back for a while by financing constraints,” he added.

Economic Growth

Traders cut a forecast that the central bank will raise the benchmark rate by a quarter percentage point as early as next month, according interbank futures on the Sydney Futures Exchange. They tipped a 32 percent chance of an increase at 3:34 p.m. in Sydney. Before today’s decision, they forecast a greater than 50 percent chance.

GDP probably expanded 0.3 percent in the second quarter from the previous three months, when it gained 0.4 percent, according to the median estimate of 15 economists surveyed by Bloomberg News today. They also predict the economy grew 0.4 percent from a year earlier. The figures will be published at 11:30 a.m. in Sydney tomorrow.

Today’s forecast follows revisions by some economists to their second-quarter GDP predictions after reports today and yesterday showed inventories tumbled by a record 3.4 percent and the current account deficit more than doubled A$13.3 billion ($11.2 billion) as exports of coal and iron ore slumped.

They previously estimated GDP rose 0.6 percent in the quarter and 0.7 percent from a year earlier.

Inflation Outlook

While inflation should continue “to moderate in the near term,” the likelihood that annual consumer price gains will remain below the bank’s target range of between 2 percent and 3 percent “now looks low,” Stevens said today.

While the central bank’s last meeting four weeks ago “was about removing the easing bias, today’s statement was about reaffirming that the next move is up, but not until a durable recovery is seen,” said Spiros Papadopoulos, an economist at National Australia Bank Ltd. in Melbourne.

“We expect that in November they will be confident enough to start raising rates without choking off confidence and demand prematurely,” Papadopoulos added.

Measures of confidence have recovered, and increased construction work and “public demand will also start to provide more support to spending soon and, hence, growth is likely to firm going into 2010,” Stevens said today.

Reports published earlier today showed building approvals rose and manufacturing expanded in August for the first time in 14 months.

Consumer Confidence

Australia’s central bank scrapped its forecast last month for the economy to contract this year, instead predicting gross domestic product will expand 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

Consumer and business confidence has surged to the highest levels in almost two years after the government distributed more than A$20 billion in cash to households since the collapse of Lehman Brothers Holdings Inc. almost a year ago.

Sentiment is also being buoyed by the government spending another A$22 billion on upgrading roads, schools, hospitals and railways.

“The economic stimulus at the moment is vital in supporting business,” Treasurer Wayne Swan told reporters in Brisbane yesterday. “Of course, stimulus is temporary” and “designed to be withdrawn from year’s end as the economy recovers.”

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