Natural disasters, rising dollar keep interest rates on hold

Australia's central bank left its benchmark interest rate at the highest level in the developed world as floods disrupt coal mining in the nation's northeast and a rising currency tempers inflation.

Reserve Bank of Australia Governor Glenn Stevens held the overnight cash rate target at 4.75 per cent for a fourth straight meeting, as forecast by all 25 economists surveyed by Bloomberg News. He called the level "mildly restrictive" and appropriate given the economy's outlook.

"The natural disasters over the summer have reduced output and the resumption of coal production in flooded mines is taking longer than initially expected," Stevens said.

"Commodity prices, including oil prices, have risen over recent months, pushing up measures of consumer price inflation in many countries."

Australia's dollar climbed to a record this week as surging mining investment reduced the economy's spare capacity. The outlook for global growth was clouded by a nuclear crisis in Japan, Australia's second-largest trading partner, and tensions in the Middle East sent oil prices higher.

"Despite a tumultuous month, the central bank is trying to keep focused on the medium-term story," said Michael Turner, an economist at RBC Capital Markets in Sydney.

"The RBA is obviously not in a hurry to come back to the table given they're ahead of the curve on inflation and have time on their side."

Employment growth "has moderated," inflation is consistent with the central bank's goal and the currency's strength is helping ease prices pressures, he said. The impact of Japan's crisis on Asia's economy is "expected to be limited", Stevens said.

Traders see a 72 per cent chance he will keep rates on hold for the rest of the year, bank bill futures show.

The Reserve Bank, which raised rates seven times from October 2009 to November last year, is pausing as the country recovers from flooding and cyclones in Queensland.

Australia's economy accelerated 0.7 per cent in the fourth quarter, from a revised 0.1 per cent three months earlier.

The nation's trade balance unexpectedly swung to a deficit in February for the first time in almost a year as the natural disasters cut mining shipments and higher fuel prices boosted imports, a government report showed yesterday.

The shortfall was A$205 million, from a revised A$1.43 billion surplus in January, the first time imports exceeded exports since March 2010.

The deficit ended a 10-month run of trade surpluses, the longest stretch since 1972-73, Westpac Banking Corp. economists led by Bill Evans said. The "much weaker than expected" trade figures mean the economy may have contracted 0.2 per cent in the first quarter, according to Westpac.

Tropical Cyclone Yasi in February tore through sugar- and banana-producing areas, following two months of flooding in Queensland that killed 36 people, shut mines and wiped out crops. The state produces 80 per cent of the coking coal exports from Australia and grows more than 30 per cent of the nation's fruit and vegetables.

Treasurer Wayne Swan said the disasters were likely to cost the economy about A$9 billion after the Government raised estimates on losses to the coal industry by 20 per cent.

Australia is undergoing its biggest mining investment expansion since the 19th century to meet demand for iron ore and coal from China and India. That propelled the Australian dollar to US$1.0417 this week, the highest level since the currency was floated in 1983.

- BLOOMBERG