Australia's central bank raised its inflation forecast and said economic growth will slow as consumers reduce spending amid record gasoline prices and the highest borrowing costs in 12 years.
"There is evidence that demand has slowed, but it will take some time for this to have a substantial impact on inflation,'' the Reserve Bank of Australia said in its quarterly policy statement released in Sydney today. Inflation will peak late this year at 4.5 percent before falling below the bank's 3 percent limit in 2010.
The nation's currency fell on speculation Governor Glenn Stevens will refrain from interest rates again this year, after boosting its benchmark to 7.25 percent in March, the fourth increase in seven months. The government has said it will cut spending in next week's budget to ease pressure on prices, which surged at the fastest pace in 17 years in the first quarter.
"The Reserve Bank remains on hold for a prolonged period,'' said Rory Robertson, an interest-rate strategist at Macquarie Group Ltd. in Sydney. "Right now they've got reasons to think they have done enough, but obviously there are risks, particularly with the commodity price boom being so large.''
The Australian dollar pared earlier gains, falling to 94.03 U.S. cents at 4:34 p.m. in Sydney from 94.41 cents immediately before the report. The two-year government bond yield declined 5 basis points, or 0.08 percentage point, to 6.37 percent.
China Demand
Rising demand from China for resources including iron-ore and coal may offset the impact of slower domestic spending on the $1 trillion economy, now in its 17th year of expansion.
"It is possible that the recent weakness in consumer sentiment and domestic spending will prove to be mostly temporary, especially in light of the large boost to national income from exports" the bank said today.
The nation's terms of trade, a measure of export income, will rise by around 20 percent this year as new coal and iron ore contracts take effect, well above the average increase over the past four years, and higher than appeared likely a few months ago,'' the central bank said.
Demand for exports is prompting companies including Rio Tinto Group to spend A$57.9 billion ($54 billion) developing mines and oil fields, stoking a record 18-month employment boom that has generated 456,000 new jobs.
Skills Shortage
Australia's labor market conditions remained strong, today's report said, reinforcing figures published yesterday showing employment rose in April by twice as much as economists forecast. The jobless rate was 4.2 percent last month, close to the lowest in more than three decades.
Concern that a shortage of skilled workers is driving up wages and stoking inflation was a key reason Stevens and his board raised borrowing costs in March, February, November and August.
There is a risk that expectations for higher inflation may become entrenched at higher than acceptable levels,'' driving up wages and prices, the bank said today.
Core annual inflation surged to 4.4 percent in the first quarter from 3.8 percent in the previous three months, a report showed on April 23. The bank aims to keep annual prices increases between 2 percent and 3 percent on average.
"The high rate of underlying inflation in the March quarter indicates that demand pressures that have been evident for some time are continuing to have a significant effect on pricing, and are allowing increases in input costs to be passed through into final prices,'' today's report said.
Growth Forecast
"The jump in consumer prices has occurred in an environment of limited spare capacity and earlier strong demand,'' the bank said. "A significant slowing in the growth of demand from the rapid pace of 2007 will be needed in order to return inflation to the target over time. There are signs that such moderation is now occurring.''
The central bank cut its forecast today for growth in June 2009 to 2.75 percent from the 3 percent predicted in February. Gross domestic product will expand 2.5 percent in June 2010, compared with a previous outlook of 3 percent.
Recent reports support the central bank's view that the nation's economy is losing momentum. March home-building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.
Mortgage Rates
GDP slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent. The first- quarter GDP report will be released on June 4.
Households, grappling with higher gasoline and food costs, are also facing extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.
"A noticeable restraining impact is being exerted on household and business borrowing and on all overall domestic demand,'' today's report said. Borrowing by companies has slowed significantly, it said.
"There is evidence that demand has slowed, but it will take some time for this to have a substantial impact on inflation,'' the Reserve Bank of Australia said in its quarterly policy statement released in Sydney today. Inflation will peak late this year at 4.5 percent before falling below the bank's 3 percent limit in 2010.
The nation's currency fell on speculation Governor Glenn Stevens will refrain from interest rates again this year, after boosting its benchmark to 7.25 percent in March, the fourth increase in seven months. The government has said it will cut spending in next week's budget to ease pressure on prices, which surged at the fastest pace in 17 years in the first quarter.
"The Reserve Bank remains on hold for a prolonged period,'' said Rory Robertson, an interest-rate strategist at Macquarie Group Ltd. in Sydney. "Right now they've got reasons to think they have done enough, but obviously there are risks, particularly with the commodity price boom being so large.''
The Australian dollar pared earlier gains, falling to 94.03 U.S. cents at 4:34 p.m. in Sydney from 94.41 cents immediately before the report. The two-year government bond yield declined 5 basis points, or 0.08 percentage point, to 6.37 percent.
China Demand
Rising demand from China for resources including iron-ore and coal may offset the impact of slower domestic spending on the $1 trillion economy, now in its 17th year of expansion.
"It is possible that the recent weakness in consumer sentiment and domestic spending will prove to be mostly temporary, especially in light of the large boost to national income from exports" the bank said today.
The nation's terms of trade, a measure of export income, will rise by around 20 percent this year as new coal and iron ore contracts take effect, well above the average increase over the past four years, and higher than appeared likely a few months ago,'' the central bank said.
Demand for exports is prompting companies including Rio Tinto Group to spend A$57.9 billion ($54 billion) developing mines and oil fields, stoking a record 18-month employment boom that has generated 456,000 new jobs.
Skills Shortage
Australia's labor market conditions remained strong, today's report said, reinforcing figures published yesterday showing employment rose in April by twice as much as economists forecast. The jobless rate was 4.2 percent last month, close to the lowest in more than three decades.
Concern that a shortage of skilled workers is driving up wages and stoking inflation was a key reason Stevens and his board raised borrowing costs in March, February, November and August.
There is a risk that expectations for higher inflation may become entrenched at higher than acceptable levels,'' driving up wages and prices, the bank said today.
Core annual inflation surged to 4.4 percent in the first quarter from 3.8 percent in the previous three months, a report showed on April 23. The bank aims to keep annual prices increases between 2 percent and 3 percent on average.
"The high rate of underlying inflation in the March quarter indicates that demand pressures that have been evident for some time are continuing to have a significant effect on pricing, and are allowing increases in input costs to be passed through into final prices,'' today's report said.
Growth Forecast
"The jump in consumer prices has occurred in an environment of limited spare capacity and earlier strong demand,'' the bank said. "A significant slowing in the growth of demand from the rapid pace of 2007 will be needed in order to return inflation to the target over time. There are signs that such moderation is now occurring.''
The central bank cut its forecast today for growth in June 2009 to 2.75 percent from the 3 percent predicted in February. Gross domestic product will expand 2.5 percent in June 2010, compared with a previous outlook of 3 percent.
Recent reports support the central bank's view that the nation's economy is losing momentum. March home-building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.
Mortgage Rates
GDP slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent. The first- quarter GDP report will be released on June 4.
Households, grappling with higher gasoline and food costs, are also facing extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.
"A noticeable restraining impact is being exerted on household and business borrowing and on all overall domestic demand,'' today's report said. Borrowing by companies has slowed significantly, it said.
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