Monday, November 30, 2009

Australia May Raise Key Rate for Record Third Month (Update1)

By Jacob Greber and Dan Petrie

Dec. 1 (Bloomberg) -- Australia’s central bank will raise its benchmark interest rate by a quarter percentage point today for a record third straight month as evidence mounts that the nation’s economy is strengthening, economists say.

Reserve Bank Governor Glenn Stevens will boost the overnight cash rate target to 3.75 percent at 2:30 p.m. in Sydney, according to 19 of 20 economists surveyed by Bloomberg. Futures traders say there is a 76 percent chance of an increase.

Central bank policy makers say the economy has entered a “new upswing” that will last several years, boosted by rising consumer confidence and China’s demand for resources such as iron ore. Still, some analysts say Stevens may delay an increase until the bank’s next meeting in February to gauge whether the recovery will slow as the government cuts stimulus spending.

“We are tipping a rate hike, but not with a high degree of certainty,” said Craig James, a senior economist at Commonwealth Bank of Australia. “Cash rates remain at historically low levels and our economy is continuing to improve. But on the other side of the equation, a slump in manufacturing investment would be weighing on board members’ minds.”

Investors have raised bets on a quarter-point rate increase today to 76 percent, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 9:38 a.m. Chances of such a move stood at 56 percent late yesterday.

‘Open Question’

The pace of interest-rate increases is an “open question” as policy makers balance the risk of keeping borrowing costs too low against an economy that may cool as government stimulus abates, central bank officials said in minutes of their November meeting, when they became the first central bankers in the world to raise borrowing costs twice since the height of the global crisis.

Business and consumer confidence, which helped Australia skirt the global recession, “could prove fragile,” and growth may slow as the effects of more than A$20 billion ($18.4 billion) in cash handouts from Prime Minister Kevin Rudd’s government and his A$22 billion of spending on roads, schools and hospitals fades next year, central bank policy makers said at their Nov. 3 meeting.

Rory Robertson, an economist at Macquarie Group Ltd. in Sydney, who yesterday forecast no change in the rate, today changed his view and said his official position is: “I don’t know.”

Retail Sales

Reports published since the bank’s last meeting showed Australia’s unemployment rate climbed in October to 5.8 percent from 5.7 percent, company profits fell in the three months through Sept. 30 for a fourth straight quarter, and retail sales unexpectedly dropped in September.

Business investment also unexpectedly fell 3.9 percent in the third quarter, led by a record 13.4 percent slump in spending by manufacturers.

Governor Stevens raised the overnight cash rate target by a quarter percentage point in October and this month. By contrast, officials in the U.S., U.K. and Europe have kept their benchmark lending rates at historic lows this year.

Speculation Stevens will continue to lead the world in raising rates has stoked this year’s 31 percent surge in the nation’s currency. The Australian dollar traded at 91.75 U.S. cents at 9:46 a.m. in Sydney yesterday.

Economic Growth

“It is now 18 years since Australia has experienced a negative in year-ended gross domestic product growth, a very prolonged expansion,” central bank Deputy Governor Ric Battellino said last week. “It is reasonable to assume that we will see this growth extended for a few more years yet.”

The economy expanded 1 percent in the first half of the year and is forecast by the Reserve Bank to grow 3.25 percent next year and in 2011. Third-quarter gross domestic product figures will be published on Dec. 16.

House prices rose 1.4 percent in October, taking this year’s increase to 10 percent, real-estate monitoring company RP Data-Rismark said yesterday.

“The strength in housing prices adds strongly to the case for tighter monetary policy,” said Alex Joiner, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Stevens is also under pressure to raise borrowing costs as a rebound in demand for commodities such as iron ore, coal and gas prompts energy companies to increase spending.

BHP Billiton Ltd. and Rio Tinto Group boosted iron-ore production to a record in the third quarter to satisfy Chinese demand for steel, which helped exports surge 5 percent in September.

The nation’s single biggest investment project, the A$43 billion Gorgon natural-gas venture involving Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc, will create as many as 10,000 jobs when construction starts early next year, Chevron said on Sept. 14.

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