Australia Raises Interest Rate for Sixth Time to 4.5% (Update1)

By Jacob Greber


May 4 (Bloomberg) -- Australia’s central bank raised its benchmark interest rate for the sixth time in seven meetings after inflation accelerated and officials judged the nation is insulated from the Greece-sparked sovereign debt concerns.

Governor Glenn Stevens increased the overnight cash rate target to 4.5 percent from 4.25 percent, the Reserve Bank of Australia said in a statement in Melbourne today. The decision was predicted by 18 of 24 economists surveyed by Bloomberg News.

Continued rate increases may pose a danger for Prime Minister Kevin Rudd’s Labor Party, which has seen voter support slump to the lowest level since before taking power in 2007 and faces an election within a year. The government, which presents its annual budget next week, also faces a backlash from mining firms after announcing plans to levy a 40 percent “super tax” on the profits of resources companies.

“If the average voter’s economic prospects deteriorate, that’s when interest rates become a factor in the political cycle,” Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney, said ahead of today’s decision.

The Australian dollar fell to 92.38 U.S. cents at 2.34 p.m. in Sydney from 92.44 cents just before the decision was announced, after Stevens said today that interest rates for most borrowers will now be “around average levels.”

Stevens, unlike counterparts in the U.S. and Europe, is under pressure to extend a world-leading round of rate increases as Australia’s economy accelerates, stoking inflation and property prices, which surged more than 20 percent in the 12 months through March. Stronger growth and higher borrowing costs have pushed the Australian dollar up 26 percent in the past year.

Greek Turmoil

Today’s decision also suggests policy makers are less concerned about factors such as Greece’s debt turmoil, which Stevens cited as a reason for keeping rates unchanged in February. The European Central Bank yesterday said it would indefinitely accept Greek debt as collateral regardless of the credit rating, after European ministers and the International Monetary Fund at the weekend agreed on a 110 billion-euro ($145 billion) bailout plan.

Governor Stevens said last month that “one would expect interest rates to be pretty close to average” given the economy is expanding at or close to “trend” and with inflation near the bank’s target range of 2 percent to 3 percent.

The pace of gains in the consumer price index almost doubled in the first quarter to 0.9 percent from 0.5 percent in the previous three months, a report showed last week. A measure of so-called core inflation, the weighted-median, rose 3.1 percent from a year earlier.

Inflation Outlook

“Even if the Reserve Bank is still comfortable that inflation will stay within the target range in 2010, it should be increasingly concerned about the outlook for 2011,” Kevin Grice, an economist at Capital Economics Ltd. in London, said ahead of today’s decision.

Australia is “likely to be the first of the world’s major economies to move beyond neutral,” pushing borrowing costs “into restrictive territory” with a benchmark rate of 6 percent by the end of next year, Grice said.

Forecasts for higher borrowing costs come as Australia’s political parties prepare for an election, due within the next 11 months. Australian leaders are vulnerable to rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

More than 90 percent of mortgages taken out last year, when the benchmark rate was slashed to a half-century low of 3 percent and Rudd’s government temporarily increased grants to first-time buyers of new dwellings to as much as A$21,000 ($19,500), were on variable rates.

Voter Support

The central bank has increased its benchmark rate by 150 basis points since early October, adding about A$300 a month to repayments on an average A$300,000 mortgage.

Support for Rudd’s government has fallen behind the opposition Liberal-National coalition for the first time since 2006, according to a Newspoll published today by the Australian newspaper.

The so-called two-party preferred vote for Labor dropped to 49 percent in the survey of 1,200 voters taken last weekend from 54 percent in mid April, and 52.7 percent when Rudd won in November 2007. The coalition’s support rose to 51 percent from 46 percent. The margin of error is plus or minus 3 percent.

“Most people are focused towards the end of the year,” Craig James, a senior economist at Commonwealth Bank of Australia in Sydney, said ahead of today’s report. “At some time they’ve got go pause, and there are indications the economy is already starting to slow.”

Consumer Confidence

A measure of consumer confidence published on April 14 by Westpac Banking Corp. slipped 1 percent last month, and separate reports showed retail sales dropped 1.4 percent in February and home-building approvals slumped 3.3 percent.

Woolworths Ltd., Australia’s biggest retailer, cut its annual sales growth forecast on April 30 in the absence of government cash handouts that stoked demand last year.

Still, Stevens is likely to remain among Asia-Pacific policy makers withdrawing monetary stimulus this year. Malaysia and India have boosted borrowing costs, while the New Zealand central bank said last week it expects to begin raising rates “in coming months.”

Australia’s economy, which skirted last year’s recession, is being stoked by increased investment in resources projects such as Chevron Corp.’s Gorgon liquefied-natural-gas project in Western Australia, potentially worsening a shortage of skilled workers that threatens to boost wage growth.

Manufacturing growth accelerated in April to the fastest pace in almost eight years, a report showed yesterday.

Inflation pressures may also intensify as a result of the government’s planned changes to the tax system, announced in Canberra on May 2, which are estimated to increase Australian real wages growth by as much as 1.1 percent.