By Jacob Greber March 16 (Bloomberg) — Australia’s central bank raised borrowing costs this month as the risk of faster economic growth stoking inflation outweighed the potential for renewed financial market turmoil caused by sovereign debt concerns. “Members concurred that the appropriate course was to set policy as required by the most likely outcome, and to be ready to respond to other outcomes if they eventuated,” central bank officials said in minutes released today in Sydney of their March 2 meeting. Governor Glenn Stevens is the first Group of 20 policy maker to increase borrowing costs this year after raising the overnight cash rate target two weeks ago by a quarter percentage point to 4 percent. Reserve Bank of Australia officials have also signaled further moves toward an “average” rate amid evidence the economy is expanding at or close to trend. “Rates are obviously heading higher, but we’re of the view the pace of tightening will be more gradual, and this confirms that,” said Su-Lin Ong , senior economist at RBC Capital Markets Ltd. in Sydney. “Domestically, they’re clearly pretty positive and repeated the idea that growth is probably at trend.” The Australian dollar fell to 91.29 U.S. cents at 12:08 p.m. in Sydney from 91.38 cents before the minutes were released. The two-year bond yield declined 2 basis points, or 0.02 percentage point, to 4.87 percent. Next Move Traders are betting there is a 28 percent chance of a quarter-point rate increase when the central bank next meets on April 6, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:53 a.m. Prior to the minutes, the chance of a move stood at 34 percent. “Members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels,” the minutes said. Fiscal problems in Europe, if not “resolved satisfactorily,” could trigger fresh turmoil in markets and renewed weakness in the global economy, which “could have implications for Australia,” the minutes said. “But while such an outcome could not be ruled out, it was not the most likely,” they said. “The central expectation remained that the global expansion would continue at a reasonable pace with significant regional differences.” Policy makers cited market concerns about the level of debt in Greece and other European countries for their decision to keep borrowing costs unchanged in February, a move that confounded the forecast of all 20 economists surveyed by Bloomberg News for a quarter-point increase. Mining Boom Australia is leading the world in raising borrowing costs after four moves in five meetings, as increased company investment on new mines and resources projects such as the Chevron Corp.-led Gorgon natural gas project in Western Australia threatens to deepen a skills shortage that may drive up wages and inflation. Stevens had increased the benchmark rate from a half- century low of 3 percent in early October. “Members discussed the prospects for the resources sector and noted that it was unlikely that all planned projects would proceed at the rate that firms hoped for, in part reflecting capacity constraints in that sector,” they said today. The ratio of business investment to gross domestic product was expected to be “at very high levels in coming years.” Hours Worked Reports published since March 2 support the central bank’s view that the economy is expanding at or close to trend, after skirting last year’s global recession. Employers boosted the working hours of staff in February by the most since 1998, a sign the job market is poised to strengthen in coming months as companies add to payrolls after exhausting scope for extended work shifts. Aggregate hours worked surged 2.4 percent last month, a report showed last week. Australia’s unemployment rate was 5.3 percent in February, almost half the level in Europe and the U.S. GDP rose last quarter at the fastest pace in almost two years, climbing 0.9 percent from the three months through September, a report showed the day after this month’s interest-rate decision. “Domestically, most economic indicators continued to point to a strengthening in economic activity,” members said in today’s statement. Policy makers also noted that while lending for home loans “had cooled a little, house prices had gained significant momentum and were continuing to rise strongly for all but the bottom segment of the market.” To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
Read this article:
Australian Central Bank Says Rate Rise Was `Appropriate’ on Inflation Risk
