Reserve Bank holds fire again on interest rates

By Michael Heath

Inflation is expected to be close to target over the next 12 months. Glenn Stevens, Reserve Bank Governor The Reserve Bank of Australia left its benchmark interest rate unchanged yesterday for a seventh straight meeting as signs of slower growth from Europe to China dimmed prospects for an acceleration in hiring at home.

Governor Glenn Stevens held the overnight cash rate target at 4.75 per cent in Sydney, as forecast by all 28 economists surveyed by Bloomberg News. Growth this year was "unlikely to be as strong as earlier forecast", Stevens said yesterday.

"Inflation is expected to be close to target over the next 12 months.

"In underlying terms, inflation has been in the bottom half of the target range, though a gradual increase is expected over time."

Stevens' decision to extend the pause to match the longest since he took the helm in 2006 reflects slowdowns in China and India - nations that account for half of Australia's exports - and concern about Europe's debt crisis. Investors reckon the central bank is too optimistic in its forecasts that growth will accelerate and inflation intensify in coming months as mining companies including BHP Billiton expand.

China's non-manufacturing industries expanded at the slowest pace in four months in June, a Monday report showed, and a purchasing managers' index dropped to 57 from 61.9 in May, the China Federation of Logistics and Purchasing said on its website on July 3. Above 50 indicates expansion.

"From Australia's perspective, it is really Asia that matters," Paul Bloxham, Sydney-based chief economist for HSBC Holdings and a former RBA official who predicts a rate increase next month, said before yesterday's decision.

"Weakness in Asia seems to more clearly reflect the temporary impact of the Japanese disaster and also the ongoing effect of tighter policy, particularly in China. Chinese officials still seem more concerned about inflation than growth."

The RBA has relied on the Australian dollar's strength to temper inflation. The aussie has risen 27 per cent in the past year and reached US$1.1012 on May 2, the highest since exchange controls were scrapped in 1983.

That appreciation mirrors rising global demand for Australian iron ore, coal and other resources, with the RBA's commodity price index advancing about 40 per cent in May from a year earlier in US dollar terms.

The central bank has expressed concern that higher consumption will clash with capacity constraints such as skill shortages caused by mining investment the Government estimates will reach A$76 billion this fiscal year.

In a May 6 review, the RBA forecast growth of 4.25 per cent this year, the fastest pace since 1999.

Consumer prices were tipped to rise 3.25 per cent over the period and core inflation was expected to reach 3 per cent.

"Skilled labour shortages are already acute within the mining and mining services sectors," wrote Dylan Eades, an ANZ Banking analyst.

Household spending accounts for 55 per cent of Australia's economy, and the central bank has sought to restrain consumption with 175 basis points of rate increases from October 2009 to November, letting investment in mining drive growth.

A report on Monday showed retail sales unexpectedly dropped 0.6 per cent in May from a month earlier, the second fall in three months.

Australia's economy shrank 1.2 per cent in the first quarter, the most since 1991, as floods in the northeast slashed coal exports.

- Bloomberg

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