Sunday, May 4, 2008

Australia Will Probably Keep Key Rate at 12-Year High (Update1)

By Jacob Greber

May 5 (Bloomberg) -- Australia's central bank probably will keep interest rates unchanged for a second month to gauge whether the highest borrowing costs in 12 years are slowing the nation's economy enough to cool the fastest inflation since 1991.

Governor Glenn Stevens will leave the overnight cash rate target at 7.25 percent tomorrow in Sydney, according to 24 of 25 economists surveyed by Bloomberg News. One forecasts a quarter- point increase.

The central bank raised interest rates in March for the fourth time in seven months after inflation surged above the 3 percent limit of its target range. Reports in the past month show consumer and business confidence have slumped, while retail sales and home building have slowed.

``Interest rates are at or near their peaks,'' said Craig James, chief equities economist at Commonwealth Bank of Australia Ltd. ``Higher-than-expected inflation figures justify another lift in rates, but there are a few more signs that recent rate hikes are working to slow the economy.''

Most economists surveyed by Bloomberg News say Stevens will leave the benchmark rate unchanged for the rest of this year as slower household and business spending bring annual inflation back within his target range of between 2 percent and 3 percent. He raised borrowing costs in March and February.

Stevens will announce the bank's decision at 2:30 p.m. in Sydney tomorrow.

Core Inflation

Surging gasoline, food and housing costs helped push core annual inflation to 4.4 percent in the first quarter, the highest rate in almost 17 years, a report showed on April 23.

An index measuring inflation rose at a record pace in April as costs for gasoline, health services and rents surged. Consumer prices climbed 4.3 percent from a year earlier, according to a gauge published by TD Securities Ltd. today.

Higher borrowing costs, as well as tighter credit standards for more risky borrowers, are working to ``foster the moderation in demand growth that was needed to ease the pressure on inflation,'' the central bank said on April 15.

The bank will lower its forecasts for economic growth and inflation when its quarterly policy statement is released on May 9, Stevens said at his half-yearly testimony to parliament's economics committee in Sydney on April 4.

``Higher interest rates and costs for staple items are forcing highly leveraged consumers to reorganize spending priorities,'' said Joshua Williamson, an economist at TD Securities Ltd. in Sydney. ``Despite the threat of high ongoing inflation,'' the chances of Stevens cutting rates ``shouldn't be underestimated,'' he said.

Losing Momentum

Recent reports suggest the $1 trillion economy's 17th year of expansion is losing momentum. March home-building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.

Gross domestic product slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent.

Households, facing higher gasoline and food costs, have also been battered by extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.

Retail sales excluding food slid 0.3 percent in March from February, according to Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.

Global Rates

Australia's central bank has raised borrowing costs 12 times since May 2002, when the rate was 4.25 percent. By contrast, Federal Reserve Chairman Ben S. Bernanke lowered the benchmark U.S. interest rate by a quarter point to 2 percent last week, the seventh cut since September. The U.K. and Canada have also cut rates this year.

Concern that the lowest unemployment rate in 33 years is driving up wages was a key reason Australian policy makers raised borrowing costs in March.

The Reserve Bank forecast in March that inflation will remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies such as miner Rio Tinto Group to expand and hire more workers in Australia.

The jobless rate probably held at 4.1 percent in March after employers added 10,000 workers, according to a survey of 25 economists. The unemployment report will be released on May 8.

Bloomberg Survey

Following is a table of forecasts for the chance of an interest-rate increase tomorrow, the rate on June 3 and at the end of the third and fourth quarters:

Chance May 6 June 3 Q3 Q4
of move Rate Rate
Median 20% 7.25% 7.25% 7.25% 7.25%
High Forecast 55% 7.5% 7.5% 7.50% 7.50%
Low Forecast 5% 7.25% 7.25% 7% 6.75%
No. of replies 25 25 25 25 25
4Cast 20% 7.25% 7.25% 7.25% 7.25%
ABN Amro 20% 7.25% 7.25% 7.25% 7.25%
AMP Capital 30% 7.25% 7.25% 7.25% 7.25%
ANZ Bank 25% 7.25% 7.25% 7.25% 7.25%
Ausbil Dexia 30% 7.25% 7.25% 7.25% 7.25%
Barclays Capital 20% 7.25% 7.25% 7.25% 7.25%
BT Financial 12.5% 7.25% 7.25% 7.25% 7.25%
Bank of America 5% 7.25% 7.25% 7.5% 7.5%
Citigroup 25% 7.25% 7.25% 7.25% 7.25%
Commonwealth Bank 55% 7.5% 7.5% 7.5% 7.5%
Deutsche Bank 40% 7.25% 7.25% 7.5% 7.5%
Goldman Sachs 35% 7.25% 7.25% 7.25% 7.25%
ICAP Australia 33% 7.25% 7.25% 7.5% 7.5%
JPMorgan Chase 30% 7.25% 7.25% 7.25% 7.25%
Lehman Brothers 10% 7.25% 7.25% 7% 6.75%
Macquarie 15% 7.25% 7.25% 7.5% 7.5%
Merrill Lynch 25% 7.25% 7.25% 7.25% 7.25%
National Australia 15% 7.25% 7.25% 7.25% 7.25%
Nomura Australia 30% 7.25% 7.25% 7.5% 7.5%
RBC Capital 10% 7.25% 7.25% 7.25% 7.25%
St. George Bank 20% 7.25% 7.25% 7.25% 7.25%
Suncorp Banking 10% 7.25% 7.25% 7.25% 7.50%
TD Securities 30% 7.25% 7.25% 7.25% 7%
UBS Australia 20% 7.25% 7.25% 7.25% 7.25%
Westpac Bank 20% 7.25% 7.25% 7.25% 7.25%

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