By Michael Heath - Dec 20, 2011 7:35 AM GMT+0700
Australia’s central bank lowered its benchmark interest rate this month because risks to global growth from Europe’s debt crisis overshadowed evidence the nation’s mining boom is intensifying, minutes of its Dec. 6 meeting showed.
While the domestic “economy was expanding at a pace broadly in line with trend,” in Europe “there was a non- trivial possibility of a very sharp contraction,” the minutes released today by the Sydney-based Reserve Bank of Australia showed. “Members concluded that growth in the world economy was likely to weaken over the coming year.”
RBA Governor Glenn Stevens and his board reduced rates by a quarter percentage point on Nov. 1 and again this month to 4.25 percent as inflation pressures eased and risks to the world economy increased. The minutes showed board members questioned whether the second cut was needed given the strength of domestic investment in resource industries.
“There had been further evidence that a major investment boom was in progress and the overall economy was expanding,” policy makers said. “Australia’s main trading partners were also still recording solid growth. This did not suggest any strong need to cut interest rates.”
The case for lowering borrowing costs revolved around the “downside risks” posed by Europe to the global economy, they said. “The risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict.”
The Australian dollar held earlier advances, trading at 99.25 U.S. cents as of 11:32 a.m. from 98.96 cents yesterday in New York.
Jobs Growth
Australia is headed for its worst annual jobs growth in 15 years and the unemployment rate advanced last month to 5.3 percent, matching the highest level this year.
“Liaison had indicated significant caution in hiring intentions, with firms waiting for evidence of growth in demand before looking to increase staff levels,” policy makers said in today’s minutes, referring to the domestic economy. Most companies “expected wage pressures to remain contained,” they said.
Traders see a 44 percent chance Stevens will cut borrowing costs by 50 basis points at the central bank’s next meeting in February, interbank cash-rate futures show.
Growth in Australia is being driven by China, the nation’s biggest trading partner, which is buying up iron ore, coal and natural gas as millions of people in the world’s most populous nation move to urban centers.
EU Turmoil
Resource projects in Australia valued at A$456 billion ($452 billion), fueled by companies such as BHP Billiton Ltd., have cushioned a slump in manufacturing and services hit by a record currency and subdued consumer spending. The Aussie reached $1.1081 on July 27, the most since it was freely floated in 1983.
Europe’s fiscal turmoil is cutting demand in China’s biggest export market, and a Chinese government campaign to rein in property prices is threatening home sales and construction. China’s economic growth cooled to 9.1 percent last quarter, the least in more than two years, and an increase in exports in November was the weakest since 2009 excluding seasonal distortions.
“The poor outcomes in Europe were weighing on Asian exports, and growth in domestic demand had moderated somewhat,” the minutes said.
Europe’s troubles have weighed on the so-called Aussie dollar in recent weeks. The world’s fifth most-traded currency has fallen about 10 percent since its July peak on concern Greece would default and trigger a repeat of the credit freeze that followed the 2008 collapse of Lehman Brothers Holdings Inc. increase economists estimated.
Money Markets
In the minutes, the RBA noted “no signs of strain in local money markets through November and banks had also been able to access short-term offshore markets with relative ease.”
Payrolls in Australia gained 44,700 through the first 11 months of this year, heading for the smallest annual growth since 1996 after a record 362,300 increase in 2010, government data showed this month. The report contrasted with figures showing the biggest six-month gain in economic growth since March 2007.
“Given the expectation that inflation would be consistent with the target over the next couple of years, members felt that there was scope for a modest reduction in the cash rate,” the minutes showed. The central bank aimed to keep domestic inflation in a range of 2 percent to 3 percent.
A day after the policy meeting, a government report showed Australia’s economy grew faster than estimated last quarter on consumer spending and mining-driven investment. Gross domestic product rose 1 percent in the three months ended Sept. 30, after growing a revised 1.4 percent the prior quarter, the fastest pace in four years, a Bureau of Statistics report released in Sydney this month said.
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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