RBA keeps interest rate firm at 4.75pc

RBA Chairman Glenn Stevens. Photo / Getty Images

The Reserve Bank of Australia left its benchmark interest rate unchanged yesterday for a fifth straight meeting as a record currency contains prices in an economy benefiting from the biggest trade windfall in 60 years.

Central bank governor Glenn Stevens held the overnight cash rate target at 4.75 per cent, as forecast by 21 of 22 economists surveyed by Bloomberg News.

Traders see a 44 per cent chance Stevens will boost borrowing costs by a quarter percentage point in August, bank bill futures showed.

The currency surpassed US$1.10 ($1.36) this week as surging mining investment cuts the economy's spare capacity.

Reports last month showed lending to Australian households and business surged and inflation accelerated to the fastest pace since 2006.

"The higher consumer price index result for the first quarter was not enough to warrant a near-term increase," Paul Brennan, a senior economist at Citigroup in Sydney, said before the decision.

"Higher interest rates are coming, we just believe that they are much more likely to occur in the second half of the year when economic growth begins to create a positive output gap and lift yearly underlying inflation."

Stevens, the only developed-nation central banker whose economy avoided recession as credit markets froze in 2008, has refrained from raising borrowing costs since November after flooding damaged crops and disrupted coal mines in Queensland.

The RBA has said it will "look through" inflation arising from the natural disaster.

Australia's benchmark contrasts with near-zero levels in Japan and the US, helping drive the currency to the strongest level since it was freely floated in 1983.

The Australian dollar touched US$1.1012 yesterday. An April inflation report showed prices rose 1.6 per cent in the first quarter from the previous three months and were 3.3 per cent higher than a year earlier.

The RBA aims to keep inflation in a range of 2 per cent to 3 per cent on average.

While the currency's rise has eased the RBA's task of controlling inflation by reducing import costs, it has hurt some manufacturers selling goods abroad.

In parts of the nation's economy, particularly urban areas not linked to the mining boom, "people are not doing it easy", ANZ chief executive Mike Smith said yesterday.

The recent acceleration in inflation is a "blip" triggered by natural disasters and the nation's rising currency is "doing the work of the central bank", he said.

Australia's terms of trade, a ratio of export prices to import prices, are at their highest level since the early 1950s and "national income is growing strongly", the central bank said after last month's decision.

Wage pressure from the mining industry are intensifying inflation concerns.

Two coal-seam gas projects, expected to cost more than A$30 billion ($40 billion), are proceeding near the Queensland port of Gladstone. Santos, Australia's third-largest oil producer, and BG Group, the UK's third-biggest gas producer, will start hiring the first of more than 10,000 construction workers needed for the two projects this year.

A central bank report last week showed loans from Australian banks and finance companies increased 0.6 per cent in March from the previous month, matching the biggest monthly advance since January 2009.

Lending to companies surged 1 per cent in March, the biggest rise since October 2008 and the third straight monthly gain, it showed.

- BLOOMBERG