Australia’s central bank unexpectedly left its benchmark interest rate unchanged for a fifth straight month, triggering the biggest drop in the local dollar in almost two months amid signs of cooling domestic demand. Reserve Bank of Australia Governor Glenn Stevens kept the overnight cash rate target at 4.5 percent, as forecast by only six of 25 economists surveyed by Bloomberg News, the RBA’s statement showed in Sydney today. Stevens added that higher borrowing costs will likely be needed “at some point.” Evidence is mounting that households, which account for more than half the economy, are spending less after policy makers embarked on the most aggressive round of interest rate increases by a Group of 20 member. Retail sales growth slowed in August to the weakest pace in six months and job advertisements in newspapers and on the Internet gained in September by the smallest amount since April, reports showed today. “Sanity has prevailed,” said Roland Randall, an economist at TD Securities Inc. in Singapore who correctly forecast today’s decision. “We have soft credit growth and inflation clearly running around the upper half of their band but not uncomfortable as yet.” Currency Declines Australia’s currency fell to 95.78 U.S. cents as of 3:23 p.m. in Sydney from 96.83 cents in New York yesterday, heading for its biggest decline since Aug. 11. It touched 97.51 cents on Oct. 1, the highest level since July 2008. The currency dropped to 80.02 yen from 80.71 yen. While current borrowing costs are close to their average of the past decade, Stevens said “if economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.” Speculation intensified in recent weeks that Stevens would boost borrowing costs before the end of the year, helping fuel an 8.6 percent surge in Australia’s currency last month and pushing it toward parity with its U.S. counterpart. The local dollar is the best performer among the 16 most actively traded currencies over the past 12 months. Economic growth is forecast to accelerate by the RBA as demand from China for iron ore and energy spurs investment spending by companies such as Chevron Corp., which is building the A$43 billion ($41.6 billion) Gorgon liquefied natural gas project in Western Australia. Surge in Hiring The boom is also fueling a hiring surge that threatens to boost wages and increase inflation, which the central bank aims to keep between 2 percent and 3 percent. Still, an annual gauge of what the RBA calls core inflation, the weighted median, was 2.7 percent in the second quarter. Stevens said today that inflation has “moderated from the excessive pace of 2008” and that is likely to “continue in the near term.” “Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend,” he said. There are signs the bank’s six quarter percentage point rate gains to 4.5 percent in May from a half-century low of 3 percent in October 2009 are damping demand. Homebuilding approvals fell in August by the most in three months, credit growth stalled, manufacturing contracted in September for the first time this year, the services industry shrank at the fastest pace in more than a year, and consumer confidence declined, recent figures showed. Retail Sales Retail sales rose 0.3 percent in August, missing analysts’ forecasts for a 0.4 percent gain, and imports fell the most since January 2009, the bureau of statistics said today. “They haven’t got a need to rush at this point because all the evidence is that inflation is around 2.75 percent,” said Stephen Roberts, a senior economist at Nomura Australia Ltd., who forecast today’s decision. “They recognize if things pan out as forecast they’ll still need to raise rates further. November is a much more likely time to start a hiking process.” Citigroup Inc.’s Joshua Williamson is among analysts who expect Stevens to add as much as 1.25 percentage points to the benchmark rate over the next 12 to 14 months. By contrast, the U.S. Federal Reserve, which has kept its main rate at a record low since December 2008, has said it’s willing to ease monetary policy further to spur growth. Higher Australian borrowing costs would further restrain the local property market, which the RBA said last week shows “welcome signs” of cooling. The bank’s six increases to date added about A$3,600 a year to repayments on an average A$300,000 mortgage. Treasurer Wayne Swan said yesterday there isn’t “any justification” for Australian lenders to boost their mortgage rates by more than the central bank’s potential move. “Banks are making healthy profits at the moment,” he said in a radio interview with the Australia Broadcasting Corp. Commonwealth Bank of Australia declined to say whether it will alter its interest rates after the central bank’s decision. Australia & New Zealand Banking Group Ltd. said there’s no “immediate” reason to alter interest rates. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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