Tuesday, December 4, 2007

Australia Keeps Key Interest Rate Unchanged at 6.75% (Update1)

By Jacob Greber and Victoria Batchelor

Dec. 5 (Bloomberg) -- Australia's central bank left its benchmark interest rate unchanged as it waits to see if the U.S. housing recession and credit-market turmoil will hurt growth.

Governor Glenn Stevens and his board left the overnight cash rate target at an 11-year high of 6.75 percent in Sydney today, as forecast by all 27 economists surveyed by Bloomberg News. The rate was raised last month and in August.

Australia has so far weathered the U.S. slowdown and financial-market ructions as consumer spending increases and exporters sell more to China and Europe. Accelerating inflation, driven by the lowest jobless rate in 33 years and rising wages, may force the central bank to raise borrowing costs in the first quarter of next year.

``One of the factors keeping them on hold is the uncertainty on global markets,'' said Tony Pearson, a Melbourne-based economist at Australia & New Zealand Banking Group Ltd. ``If it wasn't for the global financial market concerns, and uncertainty about just how severe the fallout from that will be, the case for further rate action is clear.''

Australia's dollar fell to 87.04 U.S. cents at 9:38 a.m. in Sydney from 87.40 cents before the decision was announced. The yield on the 10-year government bond fell 1 basis point to 6 percent. A basis point is 0.01 percentage point.

Economists expect the European Central Bank to leave its main interest rate unchanged this week at 4 percent and the Reserve Bank of New Zealand to keep its benchmark at 8.25 percent tomorrow, separate Bloomberg News surveys showed. The Bank of Canada yesterday unexpectedly cut its key rate by a quarter point to 4.25 percent, citing ``global financial-market difficulties'' and an ``increased risk'' to exports.

First Statement

The Reserve Bank of Australia for the first time today released a statement explaining its decision when rates are left unchanged.

``Recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity,'' Assistant Governor Malcolm Edey said in the statement.

Edey also said ``sentiment in global credit markets has deteriorated recently'' and that ``prospects for growth in the major economies appear to be weakening.''

Stevens is due to give a speech Dec. 11 in Sydney where he may discuss whether fallout from the U.S. will damp Australia's economy.

Australia's dollar had its biggest monthly decline in 3 1/2 years in November on mounting concern that losses related to U.S. subprime mortgages and the resultant credit crunch will erode global growth. The S&P/ASX 200 index dropped 3.3 percent last month after reaching a record high on Nov. 1.

Federal Reserve Chairman Ben S. Bernanke said last week that volatility in credit markets has ``affected'' prospects for the world's largest economy. The U.S. housing slump has made banks reluctant to lend to each other, pushing up credit costs and forcing the U.S. Federal Reserve to cut interest rates twice in the past three months, taking its benchmark to 4.5 percent, to shore up growth.

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said two days ago that a cut in interest rates in the 13-nation euro economy would be justified if financial- market turbulence damps economic growth and inflation.

Mounting Risks

``The credit crunch doesn't seem to be slowing as quickly as people thought,'' said Steve Ryan, an economist at St. George Bank Ltd. in Sydney. While Australia's central bank ``is still quite concerned about the inflation situation, particularly oil and food prices, the potential weakness of the global economy outweighs that.

``We could quite easily see them staying on hold'' in coming months, Ryan said.

Ryan's view contrasts with 19 of the 24 economists surveyed by Bloomberg News, who expect the central bank to raise its interest rate to 7 percent in the first quarter next year.

A report later today is expected to show Australia's economic growth accelerated to 1 percent in the third quarter from 0.9 percent in the second quarter, according to the median estimate in a Bloomberg News survey of 25 economists.

The A$1 trillion ($880 billion) economy expanded 4.8 percent from a year earlier, economists forecast. That would be the fastest rate in more than eight years, and a sign that Australia rode out the initial bout of global market turbulence in August and September.

Faster Inflation

Recent reports have added to evidence that bottlenecks at ports and railways, which are hampering exports, and demand for skilled labor is threatening to push up inflation.

An index measuring Australian consumer prices, published this week by TD Securities Ltd. and the Melbourne Institute, climbed for a 10th month in November as prices advanced 3.4 percent from a year earlier.

The central bank raised its inflation forecasts last month, fueling speculation it may need to boost borrowing costs again after this year's two quarter-point increases.

Underlying inflation will accelerate to 3.25 percent by the end of this year and remain there until June 2008, breaching the central bank's 2 percent to 3 percent target, it said Nov. 12.

Stevens' decision to raise interest rates at the bank's August and November meetings directly followed the publication of quarterly consumer-price reports by the Bureau of Statistics.

The fourth-quarter consumer price index will be released Jan. 23. Policy makers next review rates on Feb. 5 with their decision announced the following day.

``We think they'll stick to the pattern established over the past couple of years of raising rates after the CPI report, which points to increases in February and May,'' said ANZ's Pearson.

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