RBA Says Currency Containing Prices, Rate Appropriate
Nov. 26 (Bloomberg) -- Australian central bank Governor Glenn Stevens said a stronger local dollar is helping contain inflation pressures and signaled the benchmark interest rate is at an appropriate level for the near term.
"Over the coming year, we think that inflation will be pretty close to where it is now, consistent with the target," Stevens told the House of Representatives Committee on Economics in Canberra today. "Growth in labor costs, however, is no longer declining but rising."
The Australian dollar fell after his comments bolstered investors' expectations that the Reserve Bank of Australia will continue monitoring figures on prices before raising interest rates again. Stevens indicated that with unemployment hovering around 5 percent in recent months the pace of wage growth wasn't "alarming" and that figures this month on those costs weren't "view-changing."
"This is consistent with the idea that there will be no near-term move and they will reassess in February and March next year," said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. "That said, the fact that RBA is talking more about medium term upside risks to inflation should leave us in no doubt where rates are going."
Rate Outlook
Carr said he is predicting two 25-basis-point increases in the RBA's overnight cash rate target in the first half of 2011.
The RBA on Nov. 2 ended a five-month pause in raising interest rates as it seeks to contain an expected gain in consumer prices. Wages rose last quarter by the most in almost two years as growth of salaries in private industry outpaced government pay gains for the first time since the height of the global financial crisis.
"Stevens' comments highlight that the risk remains on the side of higher rather than lower inflation," said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. "The hike, plus the additional moves by the banks and the stronger Australian dollar, mean that the policy setting is about right for the period ahead."
Tighter Policy
Stevens boosted borrowing costs this month by a quarter percentage point to 4.75 percent as mining investment, job growth and overseas demand propel the economy. He has increased the benchmark lending rate seven times since October 2009.
That contrasts with the U.S. Federal Reserve's policy of a benchmark rate near zero since December 2008. The divergence has made the local dollar the second-best performer among 16 major currencies this year, with a 9.2 percent gain against the U.S. dollar.
Australia's currency traded at 97.72 U.S. cents as of 11:01 a.m. in Sydney from 98.08 cents in New York yesterday and 98.66 cents on Nov. 19.
Stevens said the Australian dollar's rise was helping contain inflation pressures and that the increase "usually takes some time to flow through fully."
Speaking about monetary policy, Stevens said today that "overall, and also taking account of the exchange rate, which has risen substantially this year, we judge this to be the appropriate setting for the period ahead."
Spare Capacity
The amount of spare capacity in the nation's economy is "pretty modest" and that "the pace of overall wage growth in the economy is gradually increasing," the governor said.
Employment in Australia rose by 29,700 jobs in October from September, a government report this month showed, almost 50 percent more than the median forecast for a 20,000 increase in a Bloomberg News survey.
"There's a bit more scope for labor demand to rise than you might think just by looking at the official unemployment rate," Stevens said. Inflation is near the midpoint of the RBA's inflation target range of 2 percent to 3 percent, he said.
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net .
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