By Jacob Greber
Oct. 16 (Bloomberg) -- Australian central bank Governor Glenn Stevens’s view that he can’t be “too timid” in raising borrowing costs is stoking speculation the benchmark interest rate will be increased next month by the most in a decade.
Experience “counsels against” an approach where policy makers who cut rates rapidly in response to a threat become “too timid to lessen that stimulus in a timely way when the threat has passed,” Stevens said in Perth yesterday.
The comments pushed Australia’s currency to a 14-month high and prompted investors to raise bets policy makers will increase the overnight cash rate target on Nov. 3 by half a percentage point to 3.75 percent. Stevens became the first Group of 20 central banker to increase borrowing costs when he unexpectedly boosted the rate last week by a quarter point.
“Stevens has put 50 basis-point moves on the table,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “The safest time to raise rates quickly is when you know they are at the wrong level, and this is the first time a recession has ended with so little spare capacity.
“It’s not going to be long before the economy is running at full pelt again.”
Investors are certain Stevens will raise rates at least another quarter point next month as consumer confidence rises and unemployment falls, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. Chances of a half-point increase next month rose to 40 percent from 10 percent prior to Stevens’s speech and 2 percent on Oct. 14, the futures showed at 3:34 p.m. today.
Currency Rises
The Australian dollar traded at 92.25 U.S. cents, close to the highest since August 2008, at 3:47 p.m. in Sydney. The two- year government bond yield jumped to 4.83 percent at 3:49 p.m. today from 4.63 percent before yesterday’s speech.
“I’ve said it consistently, interest rates will go up because they’ve been brought to emergency lows,” Prime Minister Kevin Rudd told Melbourne radio station 3AW today. “I don’t see any point whatsoever in trying to be cute with people about that.”
Stevens slashed borrowing costs by a record 4.25 percentage points between September 2008 and April to cushion the nation’s economy against the global financial crisis. His cuts included 1 percentage point reductions in October, December and February, the biggest moves since 1992.
‘Too Timid’
“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework,” Stevens said. “Experience here and elsewhere counsels against that approach.”
“The governor has made it clear he’s keen to get rates back to normal quickly,” said RBS Group Australia Ltd. Chief Economist Kieran Davies, who is tipping a half-point increase next month. The last time Australian policy makers raised borrowing costs by that much was in February 2000.
Four of 22 economists surveyed by Bloomberg today tipped a half-point increase, 17 expect a quarter-point move and one predicts no change.
Australia is only the second country after Israel to raise borrowing costs since the height of the global financial crisis. Israel isn’t a member of the G-20. U.S. Federal Reserve Chairman Ben S. Bernanke said last week he and his colleagues at the Fed “believe that accommodative policies will likely be warranted for an extended period.”
Other Asian central banks may follow Stevens in raising rates.
‘Tightening Wave’
“The region could be at the leading edge of the monetary tightening wave, though we believe the pace will be measured and modest,” Lee Heng Guie, chief economist at CIMB Investment Bank Bhd. in Kuala Lumpur, part of Malaysia’s second-largest banking group, said yesterday in a note to clients. “India and Korea will probably be the first among the Asian central banks to raise rates in the first half of 2010.”
Evidence is mounting that Australia’s economy, which skirted the global recession, is strengthening. Recent reports show consumer confidence rose this month to the highest level in more than two years, the jobless rate unexpectedly fell to 5.7 percent in September from 5.8 percent in August, the first drop in five months, and retail sales gained.
Gross domestic product rose 1 percent in the first half of this year as consumers increased spending after the government distributed more than A$20 billion ($18 billion) in cash to households. The government is spending another A$22 billion on roads, railways and schools.
“The period of greatest weakness in the Australian economy is probably past,” Stevens said yesterday. “Barring another serious international setback, the economy is likely to continue on a path of gradual expansion during 2010.”
To contact the reporter for this story: Jacob Greber in Perth at jgreber@bloomberg.net
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