Australia's Stevens Backs History of Being First, Right on Rates

By Jacob Greber and Rebecca Keenan

Oct. 7 (Bloomberg) -- Australian central bank Governor Glenn Stevens has a reputation for doing the unexpected -- and getting it right.

His gamble yesterday, when he became the first central bank chief among the Group of 20 nations to raise interest rates since the height of the global financial crisis, could make or break that reputation. Get it right and Australia will extend its 18 years of economic growth. Get it wrong and he could nip the nation’s rebound in the bud.

“Stevens is doing what he thinks is the right thing for the broader community -- if that means flying in the face of convention, he’ll do it,” said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. in Sydney. “If Australia receives another shock from the global economy, this will look like a misguided policy move.”

Stevens, a 51-year-old amateur pilot who was promoted to governor from his role as deputy in 2006, is not new to controversy. In 2007, he raised interest rates during an election campaign, destroying then Prime Minister John Howard’s boast about his government’s record of keeping borrowing costs low. In April last year, he was criticized by politicians, retailers, one of his predecessors and newspapers for raising interest rates too far too fast and risking a recession.

Instead, Australia was one of the few nations to skirt the global recession, prompting former Reserve Bank Governor Bernie Fraser in June to reverse his earlier criticism of Stevens, telling Bloomberg: “Glenn Stevens has been first class. When we look at what has happened around the world, he has proved to be one of its best central bank governors.”

Murdoch Newspaper Mellows

Even Rupert Murdoch’s Sydney tabloid the Daily Telegraph has toned down its criticism. On April 5 last year, it led its front page with a picture of Stevens and the headline: “Is This The Most Useless Man in Australia” after he raised rates to a 12-year high of 7.25 percent. Today, it was more circumspect, saying in an editorial of yesterday’s decision that Stevens “could well be right, in which case the decision to increase interest rates will be seen as practically clairvoyant.”

Demand for Australian minerals from China, the nation’s second-largest trading partner in 2008, plus a surge in consumer and business confidence, will help economic growth accelerate in coming months, the central bank says.

Governor Stevens said yesterday that gross domestic product will expand “close to trend” next year, which economists including Citigroup Inc.’s Josh Williamson say is currently between 2.75 percent and 3 percent.

By contrast, the International Monetary Fund forecast last week that the U.S. economy will expand 1.5 percent, Japan by 1.7 percent and the euro region by 0.3 percent.

November Increase

Surging domestic growth will prompt Stevens to raise rates by another quarter percentage point on Nov. 2, according to 21 of 23 economists surveyed by Bloomberg News today.

The central bank’s track record also suggests Stevens may raise rates by more than a quarter point if further evidence emerges of an economic rebound or faster gains in property prices.

The governor slashed the benchmark rate by one percentage point in October 2008 when the global credit crisis was at its worst, the biggest cut since 1992.

“Stevens was one of the first to move rates by a sizeable amount last October and others followed” around the world, said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, who was the only analyst among 20 surveyed by Bloomberg to tip yesterday’s move. “He can take a lot of credit for those aggressive moves” as they helped the economy shrug off the global recession.

Australia’s central bank also moved ahead of other central banks in May 2002, beginning a tightening cycle when economic growth was still slowing after the Sept. 11, 2001, terrorist attacks.

‘Moved Too Soon’

Investors have a 66 percent expectation Stevens will raise borrowing costs by a quarter point next month, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:58 a.m.

Australia’s currency hit a 14-month high after yesterday’s rate increase, taking its gain this year against the U.S. dollar to 27 percent. The nation’s benchmark S&P/ASX 200 stock index is headed for its steepest annual gain since 1993, beating equity gauges for the U.S. and the world.

Still, some say Stevens moved too soon.

“We would have liked to have seen the Reserve Bank hold off on this decision” for a few more months, said Margy Osmond, chief executive officer of the Australian National Retailers Association. “Even sniffs of an interest-rate increase makes a difference in terms of people’s attitudes towards spending.”

Cash Handouts

Spending by consumers, whose confidence jumped to a two- year high this month, has been buoyed by the government’s decision to distribute A$20 billion ($18 billion) in cash to households following last year’s collapse of Lehman Brothers Holdings Inc. Rate gains may prompt shoppers to cut back.

“That is a real danger” if Stevens raises rates “too quickly or by too much,” said ANZ Bank’s Hogan. “Australia is still an economy where economic growth is below trend, inflation is falling and expansionary policy is still warranted.”

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