/www.bloomberg.com/ By Victoria Batchelor
Warrnambool, Australia, Dec. 6 (Bloomberg) -- Australian central bank Governor Ian Macfarlane said the worst drought in 100 years will slow economic growth, and a faltering global recovery has restrained him from raising interest rates.
The economy will grow 3 percent in the year to June 30, 2003, less than the 3.5 percent to 4 percent forecast in May, Macfarlane said during testimony to a parliamentary committee. Inflation will be about 2.75 percent in calendar 2003, below the top of the 2 percent to 3 percent band the bank targets.
``We're not sitting on the edge of our seats waiting for the first opportunity to'' raise rates, Macfarlane told the committee, which is meeting in the seaside town of Warrnambool, 300 kilometers (180 miles) west of Melbourne. ``Our assessment, particularly of the world economy, is that it is unlikely that that would be required in any short-time horizon.''
Economists say Macfarlane's comments signal Australia's benchmark interest rate will be held at 4.75 percent until the second half of next year, ignoring yesterday's rate cut by the European Central Bank and last month's reduction by the U.S. Federal Reserve.
``There will be no change in rates in the first half of 2003,'' said Su-Lin Ong, senior economist at RBC Capital Markets.
Global Key
The U.S. Federal Reserve cut the overnight bank lending rate a half percentage point to 1.25 percent on Nov. 6, the lowest rate since July 1961. The ECB, which sets monetary policy for the dozen nations sharing the euro, trimmed its benchmark rate by a half-point to 2.75 percent, the lowest in three years.
Australia's 6.5 percent bond maturing May 2013 fell 1 basis point after Macfarlane spoke, to be yielding 5.53 percent at 1:40 p.m., Sydney time. The Australian dollar was little changed at 56.09 U.S. cents.
The central bank is likely to keep interest rates unchanged until at least the second half of next year, according to the median forecast in the Bloomberg News survey of 23 economists. The bank's next interest-rate setting meeting is Feb. 4.
Macfarlane said the global economy had slowed more than he expected when he last fronted the committee in May.
``The major determinant on monetary policy is not the drought, the major determinant is the future of the world economy,'' he said.
Crucial Pointer
``The crucial thing for us is that the Fed's action indicated to us that they now accepted that the U.S. economy was a lot weaker than they had formally thought.
And the ECB rate cut signaled Europe's economy was ``just limping along.''
Against that, Australian consumer spending is in ``good shape,'' Macfarlane said, adding he's confident business investment and consumer spending will increase, underpinning economic growth.
``There was enough in what he said to suggest that the next move in interest rates is going to be up,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia.
The meeting is being held at Warrnambool racecourse, where the tune to Australia's unofficial national anthem ``Waltzing Matilda'' was first heard. The city of 30,000 is the main center for one of Australia's richest beef, dairy and wool producing areas.
Drought Hits Growth
It is one of the few areas not affected by an El Nino-induced drought across 70 percent of Australia that has cut wheat, milk and wool production and lowered cattle prices. Australia's summer crop production will be the lowest in 20 years, the government commodity forecaster said this week.
``The major factor behind the reduction (in forecast growth) has been the drought, but the weaker world economy has also had an effect at the margin,'' Macfarlane said.
Macfarlane said Australia's growth rate will rebound to about 3.75 percent in calendar 2003 as the world economic recovery ``gradually picks up momentum through the year.''
Macfarlane is required to appear twice a year before the parliamentary committee. This is just the second time the testimony has been held outside the main cities of Sydney and Melbourne.