By Jacob Greber Feb. 2 (Bloomberg) — Australia’s central bank unexpectedly kept its benchmark interest rate unchanged for the first meeting in four to gauge the strength of an economic recovery, driving the nation’s currency to its lowest level in six weeks. Reserve Bank Governor Glenn Stevens left the overnight cash rate target at 3.75 percent in Sydney. All 20 economists surveyed by Bloomberg News forecast a quarter-point boost. Futures traders estimated a 74 percent chance of an increase. Stevens signaled he may keep borrowing costs unchanged in coming months to gauge the economic impact of previous increases. Business confidence, particularly among retailing companies, fell in December to the lowest level in six months, a report showed today. “This is a big relief and reduces the serious risk of a policy blunder,” said Prasad Patkar , who helps manage about $1.5 billion at Platypus Asset Management in Sydney. “Three consecutive hikes late last year coupled with out-of-cycle increases by commercial banks appeared to have stung. A pause is welcome.” The Australian dollar fell to 88.17 U.S. cents at 2:40 p.m. in Sydney from 89.24 cents just before the decision was released. The two-year government bond yield rose 2 basis points to 4.04 percent. A basis point is 0.01 percentage point. As information about the impact of the bank’s previous increases “is still limited, the board judged it appropriate to hold a steady setting of monetary policy for the time being,” Stevens said in a statement today. World Leader Stevens became the first central banker in the world to raise borrowing costs three times last year after Australia’s economy skirted the global recession, helped by A$20 billion ($18 billion) in cash handouts to consumers from Prime Minister Kevin Rudd and another A$22 billion in spending on roads, railways and schools. By contrast, officials in the U.S., the U.K. and Europe have kept their benchmark lending rates at historic lows. The rate gap has contributed to making the Australian dollar the top performer against its U.S. counterpart since the start of September among the most-traded currencies. There are signs Governor Stevens’s rate increases in October, November and December are restraining the mortgage market. Policy makers didn’t meet in January. Borrowing for home buying fell to a five-year low last month, according to a report yesterday by Australian Finance Group Ltd., which says it accounts for more than 10 percent of the nation’s mortgage market. The group arranged A$1.55 billion of mortgages in January, 19 percent less than a year earlier and the lowest level for any month since 2005. Mortgage Rates Interest rates in the economy have increased by about 1 percentage point more than the cash rate over the past two years, meaning the current levels are consistent with a pre-crisis cash rate of “at least” 4.75 percent, Deputy Governor Ric Battellino said in a speech in December. Battellino said on Dec. 17 monetary policy is “now back in the normal range” after lenders raised business and home-loan rates by more than the central bank increased the overnight cash rate target. Australian & New Zealand Bank Group Ltd. boosted its variable mortgage rate by 35 basis points after Governor Stevens raised the overnight cash rate target by 25 basis points on Dec. 1. Commonwealth Bank of Australia raised its home-loan rate by 37 basis points and Westpac Banking Corp. moved by the largest amount, driving up its mortgage rate by 45 basis points. Westpac’s move means households with a A$300,000 mortgage are being charged an extra A$1,008 a year, instead of the A$576 that would have been imposed had the bank merely passed on the Reserve Bank’s increases. Business Confidence “Interest-rate rises are not good for consumers full stop,” Michael Luscombe , chief executive officer of Australia’s biggest retailer Woolworths Ltd., said in an interview last month. “I think 2010 is going to be a challenging year.” Woolworths posted on Jan. 27 the slowest sales growth in a Christmas quarter since 1993. Consumer spending accounts for more than half of Australia’s economy. Business confidence, particularly among retailing companies, fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8. While all the economists surveyed by Bloomberg predicted an increase today, financial markets were less certain. Traders bet there was a 74 percent chance of a move, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 2:04 p.m. Stocks Fall Investors’ concerns that global growth may be weak this year are among reasons stock markets have fallen since the start of 2010. Australia’s benchmark S&P/ASX 200 index has shed more than 5 percent since Dec. 31. Nouriel Roubini, the New York University professor who anticipated the financial crisis, said on Feb. 1 in Davos, Switzerland, that the U.S. growth outlook remains “very dismal,” and White House economic adviser Lawrence Summers said the economy is still mired in a “human recession.” Still, economists such as Annette Beacher at TD Securities Ltd. in Singapore say Australia’s economy will rebound faster than most. A quarter-point increase today would have been “easily justified given strong Chinese growth, sticky core inflation, double-digit house-price gains” and falling unemployment, Beacher said ahead of the decision. The economy expanded in the three months through September for a third straight quarter, house prices surged 13.6 percent in 2009, and unemployment fell in December to an eight-month low of 5.5 percent, reports published since the bank’s last meeting in December show. Employers added 135,700 jobs from September through December as companies such as Chevron Corp. expand liquefied natural gas ventures to meet rising demand for energy, particularly in Asia. The economic recovery in China, Australia’s largest trading partner, has been “much quicker to date and prospects appear to be for good growth in 2010,” Stevens said on Dec. 1. China’s economy expanded 10.7 percent last quarter, the fastest pace since 2007. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
