Australia Probably Will Leave Key Rate at 12-Year High of 7.25%

By Jacob Greber


March 31 (Bloomberg) -- Australia's central bank probably will keep interest rates unchanged to gauge fallout from the global credit squeeze, the worst quarterly slump on the nation's stock market since 1987 and waning consumer confidence.

Governor Glenn Stevens will leave the overnight cash rate target at 7.25 percent tomorrow in Melbourne after quarter-point increases this month and in February to cool the fastest inflation since 1991, according to all 24 economists surveyed by Bloomberg.

Stevens has scope to delay increases in borrowing costs after the local stock market shed 16 percent this year and consumer and business confidence slumped. Households are also paying more for mortgages after Australia's five largest banks boosted lending rates by more than the central bank this year.

``Some dust needs to settle after the recent increases,'' said Joshua Williamson, a Sydney-based economist at TD Securities Ltd. ``The Reserve Bank will want to assess how consumers and businesses are adapting to a higher interest-rate environment.''

Tomorrow's rate decision will follow the first back-to-back monthly increase in more than four years on March 4. That was the 12th boost since May 2002, when the rate was 4.25 percent. Policy makers will announce their decision at 2:30 p.m. in Melbourne tomorrow.

Twelve of the economists surveyed by Bloomberg last week say the bank will raise rates in May.

The past nine months have ``been a very challenging time in international financial markets,'' and Australia's ``financial community has certainly been affected by the global turmoil,'' prompting banks to tighten lending standards, Stevens said last week.

Stocks Slump

The All Ordinaries Index has slumped 16 percent this year, and is set to complete its worst quarter since the final three months of 1987, when it tumbled 41 percent. The benchmark S&P/ASX 200 Index, which dates back to 1992, has lost the same amount to record its worst quarter.

The U.S. Federal Reserve has responded to the freeze in credit markets by cutting its benchmark interest rate at the fastest pace in two decades to 2.25 percent.

In an emergency action earlier this month, the Fed also reduced the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on that securities dealer.

Australia's five largest lenders, led by Commonwealth Bank of Australia, have added an average of 79 basis points, or 0.79 percentage point, to their home-loan interest rates this year, more than the 50 basis points added by the Reserve Bank to the overnight cash rate target in that period.

Spending Plans

Surging housing costs, as well as higher fuel and food prices, are forcing consumers and businesses to review spending plans.

Retail-sales growth stalled in January after rising for seven months, consumer confidence plunged to the lowest level in almost 15 years in March, and business sentiment in February held close to the weakest since the September 2001 terrorist attacks in the U.S.

Growth in the nation's $1 trillion economy slowed to 0.6 percent in the December quarter from the previous three months, when it expanded 1.1 percent, a report showed earlier this month.

Concern that the lowest unemployment in 33 years is driving up wages was a key reason central bank policy makers raised the benchmark rate by 25 basis points this month.

``Members viewed the standard macroeconomic considerations as continuing to suggest the need for further tightening,'' minutes from the March 4 policy meeting show. ``The economy still faced a period in which inflation could be uncomfortably high.''

Core Inflation

Annual core inflation surged to 3.8 percent in the fourth quarter, the fastest pace since 1991. The government is due to publish its first-quarter consumer prices report on April 23.

``When we get the March 2008 figures toward the end of April, we will most likely find that the rise over the four quarters is more like 4 percent,'' Governor Stevens said on March 14. ``It is far better to resist rising inflation now.''

The central bank, which aims to keep annual inflation between 2 percent and 3 percent on average, forecast last month 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. The jobless rate fell to 4 percent in February.

``The Reserve Bank is likely to continue warning of the dangers of higher inflation,'' TD Securities' Williamson said.

Bloomberg Survey

Following is a table of forecasts for the chance of an interest-rate increase tomorrow, the rate on April 1, May 6 and at the end of the second, third and fourth quarters:

Chance April 1 May 6 Q2 Q3 Q4
of move Rate Rate
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Median 10% 7.25% 7.38% 7.38% 7.50% 7.50%
High Forecast 30% 7.25% 7.50% 7.50% 7.50% 7.50%
Low Forecast 0% 7.25% 7.25% 7.25% 7.25% 7.00%
No. of replies 24 24 24 24 24 24
-----------------------------------------------------------
4Cast 0% 7.25% 7.50% 7.50% 7.50% 7.50%
ABN Amro 2% 7.25% 7.25% 7.25% 7.25% 7.25%
AMP Capital 15% 7.25% 7.25% 7.25% 7.25% 7.25%
ANZ Bank 10% 7.25% 7.25% 7.25% 7.25% 7.25%
Ausbil Dexia 10% 7.25% 7.25% 7.25% 7.00% 7.00%
Barclays Capital 20% 7.25% 7.25% 7.25% 7.25% 7.25%
Citi 10% 7.25% 7.50% 7.50% 7.50% 7.50%
Commonwealth Bank 5% 7.25% 7.50% 7.50% 7.50% 7.50%
Deutsche Bank 5% 7.25% 7.50% 7.50% 7.50% 7.50%
Goldman Sachs 10% 7.25% 7.25% 7.25% 7.25% 7.25%
ICAP Australia 1% 7.25% 7.25% 7.25% 7.50% 7.50%
JPMorgan Chase 30% 7.25% 7.50% 7.50% 7.50% 7.50%
Lehman Brothers 0% 7.25% 7.25% 7.50% 7.25% 7.25%
Macquarie 2% 7.25% 7.50% 7.50% 7.50% 7.50%
Merrill Lynch 5% 7.25% 7.50% 7.50% 7.50% 7.50%
National Australia 5% 7.25% 7.25% 7.25% 7.25% 7.25%
Nomura Australia 10% 7.25% 7.50% 7.50% 7.50% 7.50%
RBC Capital 10% 7.25% 7.50% 7.50% 7.50% 7.50%
St. George Bank 0% 7.25% 7.50% 7.50% 7.50% 7.50%
Suncorp Banking 15% 7.25% 7.25% 7.25% 7.50% 7.50%
TD Securities 20% 7.25% 7.25% 7.25% 7.25% 7.00%
Thomson 25% 7.25% 7.50% 7.50% 7.50% 7.50%
UBS Australia 10% 7.25% 7.50% 7.50% 7.50% 7.50%
Westpac Bank 10% 7.25% 7.25% 7.25% 7.25% 7.25%
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