Australia Holds Key Rate at 3.5% as Hiring, Currency Strengthen

Australia’s central bank kept interest rates unchanged after cuts in the previous two months as domestic employment strengthens and the local currency’s biggest gain in eight months helps contain inflation.

Governor Glenn Stevens and his board left the overnight cash-rate target at a 2 1/2-year low of 3.5 percent, the Reserve Bank of Australia said in a statement in Sydney. The decision was predicted by all 28 economists surveyed by Bloomberg News.

Australia recorded its best January-to-May period of hiring in five years and a A$500 billion ($513 billion) investment pipeline is driving growth in some regions, even as export prices have slumped. Stevens, who cut rates by a total of 75 basis points in May and June, held after European Union leaders agreed last week on measures to help Italy and Spain reduce the cost of servicing debt.

“The RBA sat on their hands as progress in Europe coupled with some strong domestic data paint a more upbeat picture,” Katrina Ell, an economist at Moody’s Analytics in Sydney, said before the decision. “If we continue down this path, further rate cuts look more unlikely.”

Two days after Stevens eased last month, the central bank in China, Australia’s largest trading partner, reduced rates for the first time since 2008 as Europe’s turmoil threatened to disrupt the global economy. China may introduce “more proactive” policies to support growth by stabilizing foreign trade and expanding infrastructure investment, the China Securities Journal reported June 27.
China’s Slowdown

The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing reported this week. That was higher than the 49.9 median estimate in a Bloomberg News survey of economists.

Even after last month’s rate cut, Australia has the highest borrowing costs among major developed nations as Stevens seeks to manage an economy powered by the biggest resource boom since prospectors in New South Wales set off a gold rush in the 1850s.

The latest bonanza — for iron ore, coal and natural gas — is bringing investment projects and helped keep the unemployment rate at 5.1 percent in May. That’s lower than 8.2 percent in the U.S. and 11.1 percent in the euro area.

The mining boom, rate differentials and the opportunity to bet on Chinese growth has driven a 45 percent appreciation in Australia’s currency since Jan. 1, 2009. The so-called Aussie advanced 5.2 percent in June, the biggest increase since October.
Dollar’s Strength

The sustained strength of the local dollar has helped douse consumer prices. A private gauge of Australian inflation released this week dropped in June on weaker fuel and furniture prices, signaling little cost pressure on consumers in the second quarter.

Australia unexpectedly added 38,900 workers in May, and annual economic growth of 4.3 percent in the first quarter was the fastest pace since 2007, government reports showed since the RBA’s June 5 meeting.

Earlier today, the Australian Bureau of Statistics said building approvals in May jumped 27.3 percent from the previous month, the biggest monthly gain on record.

Other data in the past month showed Australia posted monthly trade deficits from January through April, consumer confidence near the lowest level of the year and a manufacturing industry in a fourth month of contraction.

The RBA has cut the cash rate four times in the past eight months — by 25 basis points at successive meetings in November and December, by 50 points on May 1 and by another 25 points last month.

European Union leaders ushered in the strongest rally in the single currency and in Spanish bonds this year after agreeing at their June 28-29 summit to loosen bailout rules, lay the foundations for a banking union and break the link between sovereign and banking debt through the direct recapitalization of lenders.