By Jacob Greber
Oct. 15 (Bloomberg) -- Australia’s central bank can’t be too timid in raising its benchmark interest rate now that the threat of an economic crisis in the nation has passed, Reserve Bank Governor Glenn Stevens said, pushing up the local currency.
“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 told a function in Perth today. “Experience here and elsewhere counsels against that approach.”
Stevens became the first Group of 20 central banker to increase borrowing costs when he unexpectedly boosted the overnight cash rate target last week by a quarter percentage point to 3.25 percent from a half-century low. Investors are betting he will raise rates at least another quarter point next month as consumer confidence rises and unemployment falls.
“They weren’t timid on the downside and they’re preparing the market to say they’re not being timid on the upside,” said Annette Beacher, senior strategist at TD Securities in Singapore. “The market has priced 50 points spread over two meetings. Stevens could be paving the way for moving more rapidly.”
The Australian dollar rose to a 14-month high, trading at 92.01 U.S. cents at 1:32 p.m. in Sydney, from 91.50 cents yesterday in New York. The two-year government bond yield gained to 4.77 percent from 4.63 percent.
Economy Stronger
“The very low interest-rate settings were designed for a weaker economy than we are in fact facing,” Stevens said at the function organized by the John Curtin Institute of Public Policy and the Financial Services Institute of Australasia.
“This is not a problem,” he added. “In fact, it is a very desirable situation. It is simply something we need to recognize in setting monetary policy -- which means not holding interest rates at very low levels when that is no longer needed.”
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, including a 1 percentage point reduction in October last year, the biggest since 1992.
Investors are certain Stevens will raise the overnight cash rate target on Nov. 3 by another quarter point, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 1:33 p.m. Chances of a half-point increase next month more than doubled to 22 percent from 10 percent prior to today’s speech, the index showed.
‘Gradual’ Increases
“They’ll certainly be hiking again in November and probably in December, and beyond that it’s an open question,” said Adam Carr, an economist at ICAP Australia Ltd. in Sydney. The move toward a so-called neutral rate of between 5.5 percent and 6 percent “is going to be gradual, and that’s the right policy.”
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 his central bank will be prepared to tighten monetary policy when the outlook for the world’s largest economy “has improved sufficiently.”
Still, Bernanke said Oct. 9 that he and his colleagues at the Fed “believe that accommodative policies will likely be warranted for an extended period.”
By contrast 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 for the first time in five months and retail sales gained.
Government Stimulus
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 also stoking domestic demand by spending another A$22 billion on roads, railways and schools.
“The period of greatest weakness in the Australian economy is probably past,” Stevens said today. “Barring another serious international setback, the economy is likely to continue on a path of gradual expansion during 2010.
“That being so, those of us involved in monetary policy must turn our thoughts to encouraging the sustainability of that expansion.”
The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will rise 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.
‘Good Outcome’
As the economy expands, policy makers will aim to “keep inflation low” and react “in a measured but prompt fashion to changes in the risks facing the economy,” Stevens said.
While interest rates will need to be adjusted toward “a more normal” setting as the economy recovers, “there are still important matters of judgment in the timing and pace of how that is done,” he added.
“The global outlook remains uncertain and the board is very conscious of that.”
Stevens also reiterated his view that Australia’s economy has enjoyed a “good outcome” given the dangers posed by the global financial crisis.
“Australia has had an experience that, even if labeled a recession, was a pretty mild one,” he said.
-- With assistance from Tracy Withers in Wellington. Editors: John McCluskey, Michael Heath
To contact the reporter for this story: Jacob Greber in Perth at jgreber@bloomberg.net
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