Oz holds rates for second month in row

SYDNEY - Australia's central bank left its benchmark interest rate unchanged for a second straight month on signs the most aggressive round of increases in the Group of 20 is cooling retail sales and the property market.

Policymakers led by Governor Glenn Stevens kept the overnight cash rate target at 4.5 per cent, the Reserve Bank of Australia said yesterday. The decision was predicted by all 22 economists surveyed by Bloomberg News.

Stevens has returned borrowing costs to "average" levels in Australia, one of the few economies to skirt last year's global recession, increasing his "flexibility" to react should Europe's sovereign debt crisis derail the global recovery.

Policymakers also signalled in June that the decision to resume rate gains will hinge on inflation figures due late this month. There "is no incentive for them to raise rates at the moment", Roland Randall, an economist at TD Securities in Singapore, said ahead of yesterday's decision.

"We are seeing that in the partial indicators that are beginning to top out, including business and consumer confidence, retail credit markets, housing market and labour market."

Stevens has increased rates six times since early October from a half-century low of 3 per cent, citing an economic expansion the central bank forecasts will almost double to 4 per cent in the next two years fuelled by China's demand for iron ore and energy.

The interest-rate moves helped stoke a 27 per cent gain in Australia's dollar in the 12 months through April 30, making it the second-best performer among the world's 16 most-traded currencies. It has since pared around a third of those gains on signs the global economy is cooling after manufacturing weakened in China.

"While a general lift in uncertainty about the outlook is important, the Reserve Bank still makes its judgment on a more detailed assessment of its positive central case," Kieran Davies, a senior economist at Royal Bank of Scotland in Sydney, said ahead of yesterday's decision.

"In the current circumstances, we imagine that the bank still has a similar view to us, namely that Australia will continue to do well courtesy of non-Japan Asia."

Yesterday's decision comes a day after Indonesia's central bank maintained its benchmark rate at 6.5 per cent for an 11th month, as policymakers judged they have time to strengthen economic growth before responding to faster inflation. The Bank of England and the European Central Bank will also keep borrowing costs unchanged, say analysts.

If the global economy rebounds in coming months, Stevens will be forced to resume interest-rate increases starting in November, said Tim Toohey, chief economist at Goldman Sachs JBWere in Melbourne.

Rising investment by mining companies is fuelling an employment surge that has pushed Australia's jobless rate to almost half the level of the US and Europe. The rebound in jobs also threatens to stoke wages, increasing pressure on inflation that the central bank aims to keep between 2 per cent and 3 per cent on average.

The Reserve Bank's decision to return borrowing costs to "average" levels in May has given policymakers "the flexibility to await information on how the recent market uncertainty might affect the global economy, as well as news about the outlook for inflation", the bank said in the minutes of its June meeting.

Consumer prices rose 2.9 per cent in the first quarter from a year earlier, the most since late 2008.

Annual inflation held above the top of the central bank's target range in June at a 3.6 per cent pace, a gauge published yesterday by TD Securities showed.

Mining companies including Melbourne-based BHP Billiton reached an agreement last week with Prime Minister Julia Gillard on a new resources tax, ending a dispute that cost her predecessor Kevin Rudd his job and paving the way for an election this year.

The deal "addresses a key uncertainty that had cast a cloud over markets and confidence", said Paul Brennan, a senior economist at Citigroup in Sydney.

Reports published since the bank's last meeting show the economy expanded for a fifth straight quarter in the three months through March, and exports excluding farm goods surged the most in almost three decades in April.

Still, there are signs that higher borrowing costs are prompting households to cut spending that accounts for more than half of gross domestic product. Retail sales growth weakened in May to the slowest pace in three months. Manufacturing growth slowed in June for a second month and the services industry contracted, surveys of purchasing managers showed.

Stevens' 150 basis points of rate increases have added about A$3600 ($4400) a year to loan repayments on an average A$300,000 mortgage. Government figures published on July 1 showed the number of permits granted to build or renovate houses and apartments in May dropped 6.6 per cent.

Signs of a cooling housing market, which surged 20 per cent in the year to March 31, may give Stevens scope to keep borrowing costs unchanged in coming months.

Traders are betting there is no chance of a rate increase at central bank monthly meetings until next year, according to Bloomberg calculations.

- BLOOMBERG