Australian Central Bank Signals Interest Rate on Hold (Update1)
Australia's central bank said credit market turmoil may contain inflation and slow global economic growth, driving down the nation's currency as investors bet the bank will hold off raising interest rates early next year.
Governor Glenn Stevens left the overnight cash rate target at an 11-year high of 6.75 percent in Sydney today, and for the first time released a statement explaining his decision to leave borrowing costs unchanged. The current stance on monetary policy should be maintained ``for the time being,'' the bank said.
The local dollar fell against the 16 most-actively traded currencies and bonds surged after the statement and a government report showed annual economic growth was slower than analysts had estimated. The currency, a favorite for investors who borrow in yen, soared to a 23-year high last month as investors bet Stevens would raise rates as soon as February, widening the yield gap with Japan.
``The tone of the statement suggests less pressure on interest rates, so the market should take out expectations for a near-term hike,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney.
Australia's dollar fell to 87.08 U.S. cents at 4:30 p.m. in Sydney from 84.40 cents before the bank's decision was announced. The yield on the benchmark two-year government bond fell 8 basis points to 6.47 percent. Bond yields move inversely to prices and a basis point is 0.01 percentage point.
The Canadian dollar, another favorite target for carry trades, slid 0.3 percent to C$1.0135 per U.S. dollar after the Bank of Canada unexpectedly cut its benchmark interest rate a quarter- percentage point to 4.25 percent yesterday, citing ``global financial-market difficulties.'' Japan's benchmark rate is 0.5 percent.
`Big Fad'
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the difference between the two. The risk is exchange rate moves erode the profits.
``One of the big fads of the last one or two years has been the so-called carry trade,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane. ``With the downgrading of world growth by the Reserve Bank, the carry trade currencies should go down faster.''
Canada's central bank is ``the first of the major carry-trade economies to cut their cash rate, which supports the Reserve Bank's view that growth will decelerate.''
Today's Reserve Bank of Australia statement said that ``sentiment in global credit markets has deteriorated recently'' and ``prospects for growth in the major economies appear to be weakening.''
Economic Growth
Australia's A$1 trillion ($870 billion) economy expanded 4.3 percent in the third quarter from a year earlier, less than the 4.8 percent median forecast by economists in a Bloomberg News survey, as drought and bottlenecks at ports and railways restrained exports.
The economy grew 1 percent from the third quarter, when it expanded a revised 0.7 percent, the statistics bureau said today. Growth in the quarter was driven by consumer spending and exports. Australia's economy has been expanding for 16 years.
U.S. Federal Reserve Chairman Ben S. Bernanke said last week volatility in credit markets has ``affected'' prospects for the world's largest economy. The U.S. housing slump has made banks reluctant to lend to each other, pushing up credit costs and forcing the Fed to cut interest rates twice in the past three months, taking its benchmark to 4.5 percent, to shore up growth.
The Reserve Bank said today it remained concerned about the outlook for inflation.
Inflation Forecast
The central bank raised its inflation forecasts last month, fueling speculation it may need to boost borrowing costs again after this year's two quarter-point increases.
Nineteen of 24 economists surveyed by Bloomberg News last week expected the central bank to raise its interest rate to 7 percent in the first quarter next year to stem accelerating inflation. All forecast today's decision, which follows quarter-point increases last month and in August.
Underlying inflation is likely to accelerate above 3 percent in the first half of 2008, and ``to decline somewhat thereafter,'' the bank said today. The central bank aims to keep price gains to between 2 percent and 3 percent.
Today's Reserve Bank statement ``lifts the bar for a rate hike in February, or thereafter,'' said Matthew Johnson, senior economist at ICAP Australia Ltd. in Sydney. The central bank ``has shifted toward neutral, and is worried about the same things that the rest of the world is worried about -- tightening credit conditions, and slowing global growth.''
Business Borrowers
The bank said borrowing costs have risen ``appreciably since mid-year, particularly for business borrowers, as a result of both changes in monetary policy and market-driven increases in funding costs for intermediaries.'' Higher credit costs ``will help to contain private demand over the period ahead.''
Australia's retail sales growth slowed for a second month in October and home-building approvals fell, the government reported yesterday. Company profits unexpectedly declined in the third quarter for the first time in more than two years.
Economists expect the European Central Bank also to leave its main interest rate unchanged this week at 4 percent and the Reserve Bank of New Zealand to keep its benchmark at 8.25 percent tomorrow, separate Bloomberg News surveys showed.
