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Australia's Stevens Waits for World's Central Banks

(Bloomberg) — Australian central bank Governor Glenn Stevens's unexpected decision to keep borrowing costs unchanged gives his economy a chance to absorb a record series of rate increases and allow global counterparts to catch up.

"Being the only man hiking is a real problem — if you're that guy the higher exchange rate strangles parts of the economy," said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney.

Policy makers kept the overnight cash rate target at 3.75 percent in Sydney yesterday, confounding the forecasts of all 20 economists surveyed by Bloomberg for a quarter-point move and driving the nation's currency to its lowest level in six weeks. Last year's 28 percent surge against the U.S. dollar, after Stevens became the only central banker from a Group of 20 nation to raise borrowing costs three times, has eroded earnings at exporters including BlueScope Steel Ltd.

"The Australian dollar was everyone's favorite currency last year as investors went back into risk trades," said Mansoor Mohi-uddin, Singapore-based chief currency strategist at UBS AG. "Now, because the central bank has clearly changed the short-term outlook, there will be some more profit-taking by investors who have been long the Australian dollar."

Last year's Australian rate increases helped fuel gains in the nation's currency as investors sought higher-yielding assets in so-called carry trades that Reserve Bank Assistant Governor Guy Debelle said late last year are "back in vogue."

Currency Plunges

The nation's currency fell yesterday to as low as 87.81 U.S. cents, the least since Dec. 23, from 89.24 cents just before the decision was released. It traded at 88.58 cents at 12:45 p.m. today in Sydney.

Traders are betting there is only a 28 percent chance of a quarter-point move when policy makers meet on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:46 p.m. Prior to yesterday's decision, chances stood at 100 percent.

Keeping borrowing costs unchanged at the central bank's first meeting since Dec. 1 allows policy makers to judge the impact on consumers and businesses of previous increases, Stevens said.

The pause also comes amid signs that global credit conditions "remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness," he said. "Concerns regarding some sovereigns have increased."

Global Rates

Investors concerned that Greece's budget deficit, the biggest in the European Union, will spread to other nations in the region has triggered a 5.1 percent slump in the euro against the yen and a 2.7 percent decline against the dollar this year.

Concerns about the pace of the global recovery have also increased speculation that policy makers in the U.S. and Europe aren't likely to raise borrowing costs any time soon.

Interest rates are "appropriate," European Central Bank President Jean-Claude Trichet said on Jan. 14 after leaving the benchmark at a record low of 1 percent. The Federal Reserve restated its intention last week to keep interest rates near zero for an "extended period," saying the pace of "economic recovery is likely to be moderate for a time."

By contrast, Australia's economy shows signs of strengthening after skirting last year's global recession, boosted by A$20 billion ($18 billion) in cash handouts to consumers from Prime Minister Kevin Rudd.

'Time to Catch Up'

Employers added 135,700 jobs between September and December, the biggest four-month surge in hiring in more than three years, driving unemployment down to an eight-month low of 5.5 percent.

The economy expanded in the three months through September for a third straight quarter and house prices surged 13.6 percent in 2009.

Stevens and his board "were worried about being on their own," said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney.

Regions : Asia

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