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The Reserve Bank of Australia signaled a higher bar for interest-rate increases after becoming the world's first major central bank to withdraw "emergency" stimulus used during the global financial crisis.
Stevens's job is now to decide whether surging investment in mines, along with a 20 percent jump in house prices and rising commodity costs, will push inflation above the bank's 2 percent to 3 percent target range without further action. One keen observer: Prime Minister Kevin Rudd, who faces an election within a year and may be vulnerable should rates start to erode households' purchasing power.
"There is now a far stronger case for the Reserve Bank to pause, especially as it now believes borrowing costs are back to 'normal'," said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. "Until now, consumers have remained confident, but the rate hikes have made them reluctant to spend."
The central bank's next steps will be "to move monetary policy to restrictive settings, designed to slow the economy down," James said.
'Significant Adjustment'
The Australian dollar, which has climbed 23 percent in the past 12 months, tumbled against the U.S. dollar by the most in three months after Stevens said yesterday that the bank's increase in borrowing costs from a record-low 3 percent in early October was a "significant adjustment."
The local currency traded at 91.01 U.S. cents at 12:28 p.m. in Sydney from 92.45 before the decision was announced. Traders are betting there is a 16 percent chance of a quarter-point increase in benchmark rate on June 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:05 p.m.
Stevens, unlike counterparts in the U.S. and Europe, is under pressure to extend a world-leading round of rate increases as Australia's economic expansion strengthens.
Federal Reserve officials restated their intention on April 28 to keep the benchmark interest rate near zero for an "extended period." The head of the European Central Bank, Jean-Claude Trichet, presiding over a record-low rate of 1 percent, this week diluted rules for the second time in a month to guarantee the bank will keep taking Greek government bonds as collateral for loans.
Target Range
Stevens said yesterday that inflation, which peaked at 5 percent in 2008, may not slow as much as earlier forecast and "now appears likely to be in the upper half of the target zone over the coming year."
By contrast, the governor predicted three months ago that inflation "would be in line" with its target range. The central bank will publish its latest forecasts for inflation and economic growth on May 7.
"The RBA's growth and inflation forecasts are clearly in the process of being changed," said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney.
Stevens "has only a relatively limited window to pause at average interest rates" and will resume increasing borrowing costs in the fourth quarter, taking the benchmark to 5.25 percent in early 2011, Roberts said.
Building Approvals
Reports today showed home-building approvals rose in March at the fastest pace since 2002, surging 15.3 percent from February, and an index of the nation's services industry expanded in April for the first time in five months.
The jump in approvals "is encouraging and a good leading indicator for employment, particularly for workers in the construction industry," said Michael Turner, an economist at 4Cast Ltd. in Sydney.
Continued rate increases may pose a danger for Rudd's Labor Party, which has seen voter support slump to the lowest level since before taking power in 2007 and faces an election within the next year.
Australian leaders are vulnerable to rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.
More than 90 percent of mortgages taken out last year, when the benchmark rate was slashed and Rudd's government temporarily increased grants to first-time buyers of new dwellings to as much as A$21,000 ($19,100), were on variable rates.
Mortgage Repayments
The central bank has boosted the benchmark rate by 150 basis points since October, adding about A$3,600 a year to repayments on an average A$300,000 mortgage.
Australia's four largest banks, Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd., yesterday boosted the rates on their variable home loans by 25 basis points to between 7.51 percent and 7.24 percent.
Support for Rudd's government has fallen behind the opposition Liberal-National coalition for the first time since 2006, according to a Newspoll published yesterday by the Australian newspaper.
The so-called two-party preferred vote for Labor dropped to 49 percent in the survey of 1,200 voters taken last weekend from 54 percent in mid April, and 52.7 percent when Rudd won in November 2007. The coalition's support rose to 51 percent from 46 percent. The margin of error is plus or minus 3 percent.
Consumer Confidence
There are also signs that the bank's previous moves are prompting consumers to pare spending. A measure of consumer confidence published on April 14 by Westpac Banking Corp. slipped 1 percent last month, and separate reports showed retail sales dropped 1.4 percent in February and home-building approvals slumped 3.3 percent.
Woolworths Ltd., Australia's biggest retailer, cut its annual sales growth forecast on April 30 in the absence of government cash handouts that stoked demand last year.
"We don't need a hyped up central bank goose stepping all over the economy like they did in early 2008," said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. "If the RBA does ease off a touch now, they may need to engage the odd 50-basis-point move down the track. That's a small price to pay, though, to be more certain on the economy now."
