RBA Calls Rate Rise `Prudent' to Curb Inflation, Minutes Show

(Bloomberg)--Reserve Bank of Australia policy makers said they raised interest rates this month to counter an expected acceleration in inflation as mining investment, job growth and overseas demand propel the nation’s economy.

“The board judged that the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent,” the central bank said in minutes of its Nov. 2 meeting released in Sydney today. The RBA increased its benchmark interest rate at that meeting to 4.75 percent after a five-month pause. Surging shipments of iron ore, coal and energy to China are boosting Australia’s growth, prompting companies such as BG Group Plc to increase investment and hiring. That has helped spur the local currency to parity with the U.S. dollar, which the central bank said today would help damp inflation pressure even as it hurts industries such as tourism.

The minutes indicate the decision to raise rates “was much more of a pre-emptive move,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It was very much driven by their medium-term views on above-trend growth and rising inflation.” She doesn’t expect the bank to move again until late in the first quarter next year.

Steven’s Direction

Governor Glenn Stevens has raised the RBA’s overnight cash rate target seven times since October 2009, in contrast with the U.S. Federal Reserve’s policy of a benchmark rate near zero since December 2008. That divergence has made the local dollar the second-best performer among 16 major currencies this year, with a 9.7 percent gain against the U.S. dollar.

“A gradual upward trend in inflation remained likely over the medium term,” policy makers said in the minutes. “If monetary policy was to be conducted in a forward-looking way, these developments meant there was a case for increasing interest rates at the current meeting.”

The Australian dollar surged this month to the highest level since exchange controls were removed in 1983, reaching $1.0183 on Nov. 5. The local dollar fetched 98.44 U.S. cents at 1:14 p.m. in Sydney, little changed from 98.38 cents before the minutes were released. RBA policy makers said that while the stronger currency was affecting industries including tourism, surveys indicated that conditions for manufacturers were “around average.” That partly reflected the benefits of cheaper imported capital equipment and components, according to the minutes.

Fewer Risks

The central bank said that while this month’s decision to raise rates was also “finely balanced,” some of the uncertainties that were a reason to keep borrowing costs steady, including risks to the global economy, “had lessened recently.” Policy makers noted the possibility that the nation’s banks would boost rates on loans by more than the move in the benchmark rate, while saying that “this tendency would not be lessened by delaying a change in the cash rate.”

Westpac Banking Corp. and National Australia Bank Ltd. last week announced increases to their standard variable home-loan rates, following Australia & New Zealand Banking Group Ltd. and Commonwealth Bank of Australia. All boosted borrowing costs by more than the rise in the RBA cash rate.

Inflation Target

RBA policy makers aim to keep inflation within a target range of 2 percent to 3 percent. While the rate slowed to 2.8 percent in the third quarter, a monthly gauge compiled by TD Securities Ltd. and released Nov. 1 showed an annual jump in consumer prices of 3.8 percent for October.

“While inflation had moderated, it was likely that the decline was now largely complete,” the minutes said today. “Inflation was expected to remain around the current level for several quarters, but was likely to move higher thereafter.’

The RBA, in a quarterly report on Nov. 5, reiterated its forecast that economic growth will strengthen to 3.75 percent by the end of 2011, climbing to 4 percent by the end of 2012. Consumer prices will rise 2.75 percent through June 2012; previously, the RBA had estimated inflation of 3.25 percent through mid-2011. A report last week showed Australian employers added 29,700 workers from September, almost 50 percent more than the median forecast for a 20,000 increase in a Bloomberg News survey. The jobless rate rose to 5.4 percent in October, a six-month high as the participation rate in the labor force surged to a record.

5,000 Jobs

BG Group, a U.K.-based energy company, said last month it will begin work on a $15 billion liquefied natural gas venture in Queensland, generating 5,000 construction jobs. Even so, the RBA said in the minutes that Australian consumer spending, which accounts for more than half of gross domestic product, remained cautious.

Home-building approvals and retail sales were weaker than economists forecast in September, and house-price gains decelerated in the third quarter, reports published this month showed. Consumer confidence declined in November to a five-month low, according to a survey released last week.

Traders in futures contracts are betting on a 2 percent chance the RBA will boost its key rate by a quarter point to 5 percent next month, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:08 p.m.

To contact the reporter for this story: Michael Heath in Sydney at heath1@bloomberg.net