Reserve Bank governor Glenn Stevens is likely to keep interest rates unchanged until July, a record stretch, economists say as speculation of a global recession spurs the nation’s bonds to lead a worldwide rally.
Mr Stevens will hold the overnight cash-rate target at a developed-world high of 4.75 per cent tomorrow and leave it there until the middle of next year, the median of 22 economists’ estimates showed.
Yields on government notes from one to 12 years in maturity fell below the Reserve Bank’s benchmark last quarter as they rallied 9.9 per cent over the past 12 months, the steepest gains among 26 markets tracked by Bloomberg.
The RBA, which last raised rates in November, is balancing inflation driven by resources investment and a stronger currency that’s hurt manufacturing jobs and damaged confidence.
Mr Stevens has opted not to respond to the fastest annual inflation growth in three years as Europe’s intensifying debt crisis roiled financial markets and pushed global equities to the biggest drop since 2008.
“For the RBA to remain on hold for more than two years would be very unusual, but I would argue the circumstances are very unusual right now,” said Stephen Walters, JPMorgan Chase’s chief economist in Australia, who last week dropped his forecast for two rate increases in 2012. The currency’s recent decline has “done some of the loosening for the RBA and that will have taken some pressure off,” he said.
The so-called Aussie dollar, the world’s fifth-most traded currency, has dropped 13 per cent from its record-high $US1.1081 reached July 27 amid speculation Greece will default and spur a repeat of the 2008 credit freeze that followed the collapse of Lehman Brothers. The Australian currency slid more than 1 per cent to as low as 96.62 US cents.
Ten-year Australian government bond yields fell 15 basis points in September to 4.22 per cent, completing the longest stretch of monthly declines since at least 1978. Money-market rates also dropped last quarter, with cash-rate futures signaling in August the RBA would lower rates as much as 125 basis points by year end.
The tension between the economic stimulus from record mining investment and the global disruptions spurred by US and European fiscal crises have left economists split between bulls and bears with regard to RBA rates.
Forecasts in the Bloomberg survey for the key rate’s level on June 30, 2012, ranged from 4 per cent to 5.25 per cent, with five expecting at least one reduction, seven seeing rates unchanged and 10 predicting an increase in borrowing costs.
RBA deputy governor Ric Battellino signalled last month that market pricing showing traders betting on rate cuts by the central bank was “pessimistic”. December cash-rate futures yielded 4.12 per cent today, up from a 2011 low of 3.47 per cent on August 9. The RBA had considered raising borrowing costs in August after a July 27 report showed annual inflation accelerated to 3.6 per cent in the second quarter.
“The elevated level of inflation will keep the RBA from cutting rates,” said Paul Bloxham, chief economist for HSBC in Sydney. “We have not seen enough weakness in the global or local economy, as yet, to see the RBA revising down its forecasts such that inflation heads to the lower part of the target band.” The central bank aims to keep inflation within a 2 per cent to 3 per cent range on average.
Consumer prices rose 2.8 per cent last month from a year earlier following a 2.9 per cent annual gain in August, according to an index compiled by TD Securities Inc. and the Melbourne Institute released in Sydney today.
The manufacturing index dropped to 42.3, the lowest level since June 2009, from 43.3 in August, the Australian Industry Group and PricewaterhouseCoopers said in a survey released today. It was the sixth month in seven the index was below 50, the dividing line between expansion and contraction.
The RBA in August extended the current rates pause to 10 months, the longest stretch without a move since a 13-month hiatus that ended in May 2006, four months before Mr Stevens took office as governor. The central bank held borrowing costs from December 1994 to July 1996 in the longest period without a move since policy makers began targeting inflation with monetary policy in January 1990.
