Australia May Hold Rate at 4.5% as Increases Start to ’Bite’

By Jacob Greber and Daniel Petrie


May 31 (Bloomberg) -- Australia’s central bank may keep its benchmark interest rate unchanged this week after the most aggressive round of increases in the Group of 20 restrained retail sales and slashed mortgage lending by a quarter.

The central bank will leave the overnight cash rate target at 4.5 percent at 2:30 p.m. in Sydney tomorrow, according to all 22 economists surveyed by Bloomberg News. A separate report this week may show economic growth slowed to 0.6 percent last quarter from 0.9 percent in the previous three months, analysts predict.

The Reserve Bank of Australia’s decision may be echoed across Asia this week as central banks from Indonesia to Thailand and the Philippines are forecast to hold off on rate increases as they gauge fallout on the global economy from Europe’s debt crisis. Investors boosted bets this month that Governor Glenn Stevens will keep Australia’s policy rate unchanged until 2011.

“Uncertainty has increased regarding the global economic outlook,” said Shane Oliver, senior economist in Sydney at AMP Capital Investors, which manages $90 billion in assets. “The rate hikes to date are starting to bite.”

Stevens increased rates six times since early October from a half-century low of 3 percent, citing surging Asian demand for Australian commodities and a jobs boom that has pushed down unemployment to around half that of the U.S. and Europe.

European Rescue

The interest-rate moves helped stoke a 27 percent gain in Australia’s dollar in the 12 months through April 30, making it the second-best performer among the world’s 16 most-traded currencies. The currency has since pared around half of those gains as European Union policy makers scrambled this month to prevent a potential Greek debt default.

Thailand’s central bank will probably maintain its benchmark rate at 1.25 percent on June 2 and Bank Indonesia may keep borrowing costs at 6.5 percent on June 4, according to separate Bloomberg surveys. The key rate in the Philippines is forecast to be held at 4 percent on June 3.

Australia’s economy, which skirted last year’s global recession and surged in the final three months of 2009, shows signs of slowing as higher borrowing costs and the end of government stimulus weigh on domestic demand. First-quarter GDP figures will be published at 11:30 a.m. in Sydney on June 2.

“It’s now clear that the Reserve Bank should have left rates on hold in May and arguably in April,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “And it’s not just the volatility on global markets. The one common element across businesses is the reluctance to spend.”

‘Rapid Deterioration’

Virgin Blue Holdings Ltd., Australia’s No. 2 carrier, cut its profit forecast last week on a “rapid deterioration” in leisure travel and rising industrywide capacity.

Reports to be released ahead of tomorrow’s rate decision will show retail sales increased 0.3 percent in April, matching the weakest growth rate in a year, and building approvals fell for the third month in four, analysts forecast. Those figures will be published at 11:30 a.m. in Sydney.

The nation’s property market, which surged 20 percent in the year to March 31, is also showing signs of weakening. Home- loan approvals dropped 25 percent in the six months through March to the lowest level in nine years.

“The slowdown in the housing market over the past month is a real concern,” said David Airey, president of the Real Estate Institute of Australia. “Since early April, we’ve seen the market change from buoyant to slow and depressed.”

Consumer Behavior

Australia’s monetary policy is now “well placed” and interest-rate increases so far are “beginning to affect behavior” of consumers, central bank officials said in the minutes of their last meeting on May 4.

Investor bets that Stevens will resume boosting rates in coming months because of faster inflation have all but evaporated this month.

Traders are betting there is no chance of a quarter-point rate increase at central bank monthly meetings until December, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is also a 14 percent chance of a rate cut tomorrow, the futures showed at 11:42 a.m. on May 28.

Keeping rates on hold in coming months may assist Prime Minister Kevin Rudd’s campaign to win an election that is likely to be called this year.

“With rates now broadly neutral and risk aversion so elevated, we see little reason for tightening” soon, said Tim Toohey, chief economist at Goldman Sachs JBWere Ltd. in Melbourne. Still, the “risk of meaningful financial spillovers from European sovereign concerns to the domestic economy is limited,” he said, adding that the bank may resume tightening monetary policy as early as August.