Australia and India raised interest rates to cool inflation, hours before the U.S. Federal Reserve meets to debate a fresh round of asset purchases that may stoke price and currency pressures in Asia.
The Reserve Bank of Australia cited medium-term inflation risks for today’s unexpected decision to raise its benchmark rate. India’s central bank boosted borrowing costs for a sixth time this year after consumer prices accelerated at the second- fastest pace among Group of 20 nations.
The decisions highlight the divergence between Asian and emerging economies where recoveries are strengthening, and the U.S. and Japan where policy makers are weighing additional stimulus to jump-start growth. Australia’s dollar climbed to parity with the greenback, leading Asian currencies higher on speculation the Fed’s monetary easing will spur capital inflows to higher-yielding assets in the region.
“Inflows into Australia and emerging markets like India will only rise after today’s decisions,” said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong. “The Asia-Pacific central banks face the task of balancing the competing objectives of curbing inflation and managing their exchange rates at the same time.”
Australia’s central bank Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.
Reserve Bank of India Governor Duvvuri Subbarao boosted the repurchase rate by a quarter-point to 6.25 percent and the reverse repurchase rate by a similar margin to 5.25 percent.
The announcements by Stevens and Subbarao came amid the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis.
The U.S. Federal Reserve meets tomorrow to consider pumping additional stimulus into the world’s largest economy. The divergence in monetary policies has stoked the Australian dollar, which has gained about 11 percent this year against the U.S. currency.
About 18 hours after the Fed’s move, the Bank of England will announce the result of its monetary policy meeting. The European Central Bank will go public with its decision 45 minutes later.
The Bank of Japan cut rates on Oct. 5 and brought forward the date of its next policy meeting to Nov. 4 and 5 to discuss purchases of exchange-traded funds and real-estate investment trusts.
The Australian dollar surged 1.2 percent to 99.93 U.S. cents as of 8 a.m. in London from 98.71 cents in New York yesterday. It earlier reached $1.0003. The Aussie climbed 1.4 percent to 80.55 yen.
Since Subbarao’s first rate increase on March 19, the spread between India’s debt due in a decade and 10-year Treasuries widened 131 basis points, or 1.31 percentage points, to 551 yesterday. The gap, which has averaged 317 in the past decade, reached a 10-year high of 567 basis points on Oct. 20.
Higher yields spurred an unprecedented $10 billion inflow into rupee debt this year. Overseas funds also poured a record $25 billion into Indian stocks on prospects of faster growth in the South Asian nation, strengthening the rupee and driving the Bombay Stock Exchange’s Sensitive Index to near a record.
Since Jan. 1, the rupee has risen 4.5 percent to 44.48 against the dollar while the Bombay Stock Exchange’s Sensitive Index has jumped 16.5 percent. The rupee gained 0.2 percent as of 11:48 a.m. in Mumbai, while the benchmark stock index was little changed at 20,344.
Australia’s jobless rate, at 5.1 percent in September, is about half the level of unemployment in the U.S. and euro zone. The International Monetary Fund predicts Australia’s growth will advance to 3.5 percent next year from 3 percent this year as resources investment intensifies.
Two days ago, BG Group said it will begin building a $15 billion liquefied natural gas venture in Queensland state, generating 5,000 construction jobs. Investment there and in Western Australia, including Chevron Corp.’s A$43 billion ($42.5 billion) Gorgon liquefied natural gas project, is growing because of stronger Chinese demand for raw materials.
“The bank still sees Australian interest rates as likely to continue to rise as the mining boom progresses,” said Ivan Colhoun, head of Australian economics at Australia & New Zealand Banking Group Ltd. “This likely reflects the need to move nominal rates higher to match any rise in inflation and, at some stage, to also raise real interest rates too.”
Commonwealth Bank of Australia, the nation’s biggest home lender, will raise its standard mortgage interest rate by almost double the central bank’s increase. CBA’s standard variable home loan interest rate will be raised by 45 basis points, or 0.45 percentage point, to 7.81 percent on Nov. 5, the Sydney-based bank said today.
Treasurer Wayne Swan has urged banks not to boost borrowing costs by more than central bank increases, calling CBA’s move a “cynical cash grab.” Australian politicians are sensitive about rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.
India’s rate increase is aimed at slowing the fastest inflation after Argentina in G-20 and at protecting the purchasing power of 75 percent of Indians who live on less than $2 a day. Consumer prices rose 11.1 percent in Argentina in September, while CPI for industrial workers gained 9.9 percent in India.
India’s rate decision is “aimed at making sure that inflation doesn’t get out of hand,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. At the same time, “it’ll further add to higher inflows” of capital from overseas, he said.
Subbarao reiterated the central bank’s inflation and growth forecasts made in July. He expects the benchmark wholesale-price inflation to slow to 5.5 percent by March 31 from 8.6 percent in September and the economy to expand 8.5 percent in the year ending March 31.
The governor said “excess global liquidity” along with the “significant” growth and interest-rate differentials between advanced countries and India may result in an “intensification” of capital flows into India and said the chance of further policy tightening in the “immediate future is relatively low.”
Other Asian central banks are already keeping rates on hold to prevent a surge in capital inflows.
Bank Indonesia may keep its benchmark interest rate unchanged tomorrow as inflation within the central bank’s target range gives policy makers room to delay an increase that could spur capital inflows, economists said.
South Korea left borrowing costs unchanged at 2.25 percent for the third straight month in October. Bank of Korea Governor Kim Choong Soo has said they will take some time to normalize as policy makers must be sure of the world recovery. Exchange-rate volatility is among the threats to economic growth, the central bank said in a statement after last month’s decision.
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