Tuesday, October 2, 2007

Australia's Central Bank Keeps Rate Unchanged at 6.5% (Update1)

By Victoria Batchelor

Oct. 3 (Bloomberg) -- Australia's central bank kept its interest rate unchanged for a second month to provide time for policy makers to assess whether global financial-market turmoil will slow economic growth.

Governor Glenn Stevens left the overnight cash rate target at 6.5 percent in Sydney today, as expected by all 27 economists surveyed by Bloomberg News. The bank raised the rate to an 11- year high Aug. 8, before fallout from the U.S. subprime-mortgage slump began to ricochet around the world.

Central banks in England and Europe are forecast to join Australia in leaving rates unchanged this week as they watch for further signs of an easing in the global rout that led to a plunge in share markets and a surge in borrowing costs worldwide. Australia's key stock index rose to a record yesterday on growing optimism the worst of the credit crisis may be over.

``The safest course is for Australia's central bank to stay on the sidelines while officials gauge the extent to which tighter credit has damaged the economy,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney.

The central bank doesn't explain its verdict when interest rates are kept unchanged.

Australia's dollar traded at 88.50 U.S. cents at 9:41 a.m. in Sydney from 88.46 cents before the decision was announced. The yield on the 10-year government bond rose 1 basis point to 6.15 percent.

The Reserve Bank of Australia joined counterparts in Europe and the U.S. in lending extra money to commercial banks over the past two months to ease a global credit squeeze. The Federal Reserve last month cut the benchmark U.S. interest rate for the first time in five years.

England, Europe

The Bank of England will leave its key rate unchanged at 5.75 percent and the European Central Bank will keep its benchmark at 4 percent tomorrow, according to Bloomberg News surveys of economists.

Stevens said last month that the nation's businesses and consumers face tougher borrowing conditions over the months ahead which may act as a ``restraint'' on growth. Still, he said that economies in Asia and Australia are ``weathering the storm fairly well.''

Australia's economy is in its 16th consecutive year of expansion as Asia's appetite for commodities stokes an investment boom and drives record profits for miners, while income-tax cuts and a 33-year low jobless rate fuel consumer spending.

Borrowing Costs

``The Reserve Bank appears confident that the ever resilient Australian economy will weather the current global turmoil,'' said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. Still, ``it's likely to be monitoring the emergence of higher mortgage and consumer finance rates from a number of lenders.''

In Australia, the rate that commercial banks charge each other for one-month loans soared to an 11-year high 7.07 percent on Sept. 12 even after the Reserve Bank left its benchmark unchanged last month.

Rams Home Loans Group is among Australian companies that have raised borrowing rates for customers in response to the shortage of credit. The Sydney-based lender yesterday increased home-loan rates by between 15 and 30 basis points.

``The increase brings Rams into line with many other Australian lenders who have recently made similar increases,'' Chief Executive Officer Greg Kolivos said in a statement.

Global economic instability stemming from credit-market turmoil is ``likely to be protracted,' the International Monetary Fund said last week. Goldman Sachs Group Inc. cut its forecast for world economic growth, citing fallout from the U.S. housing slump.

`Watch and Wait'

``Australia's central bank is in watch-and-wait mode,'' said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. ``Though local growth and inflation are still uncomfortably high for the Reserve Bank, it will prefer to wait at this stage for more clarity on financial markets.''

There are signs the turbulence is fading. Citigroup Inc. said it expects little further impact from last quarter's global squeeze on liquidity. The Morgan Stanley Capital International Asia-Pacific Index of shares rose to a record yesterday.

The Reserve Bank now awaits the Oct. 24 release of the third-quarter consumer price index.

Commonwealth Bank of Australia's economists estimate that the annual underlying inflation rate will remain at 2.8 percent in the quarter. The central bank aims to keep annual inflation between 2 percent and 3 percent on average.

``The inflation backdrop favors an interest-rate increase,'' said Michael Blythe, chief economist at Commonwealth Bank in Sydney. ``But brittle market sentiment and global growth uncertainties should keep the RBA sidelined.''

Twenty of 25 economists surveyed say the central bank will keep borrowing costs unchanged for the rest of the year. Sixteen of those predict an interest-rate increase by June 2008.

The economy expanded 4.3 percent in the second quarter from a year earlier, the fastest pace in three years.

Last Updated: October 2, 2007 19:42 EDT

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