Sept. 8 (Bloomberg) -- Australian business confidence jumped in August to its highest level in almost six years, increasing pressure on the central bank to raise borrowing costs from a half-century low as the economy rebounds.

The sentiment index rose 8 points to 18, the highest level since October 2003, according to a National Australia Bank Ltd. survey of more than 550 companies questioned between Aug. 24 and Aug. 28, and released in Sydney today. A figure above zero shows optimists outnumber pessimists.

Surging business confidence may prompt Reserve Bank Governor Glenn Stevens to raise the benchmark interest rate from its “emergency level” of 3 percent as soon as next month. National Australia Bank today scrapped an earlier forecast that the economy would stagnate this year, saying gross domestic product will rise 0.6 percent in 2009 and 2.1 percent in 2010.

“The survey clearly points to continuing strong growth in demand in the third quarter,” said Alan Oster, chief economist at National Australia Bank in Melbourne. The “better domestic outlook and much better confidence levels further erode the case for maintaining emergency lows in interest rates.”

Governor Stevens, who left borrowing costs unchanged last week for a fifth month, may raise the overnight cash rate target by a quarter point on Oct. 6, before taking the rate to 3.75 percent by early 2010, Oster added.

The Australian dollar traded at 85.42 U.S. cents at 11:34 a.m. in Sydney from 85.45 cents just before the report was released. The two-year government bond yield was unchanged at 4.55 percent.

Retail Sales

Stevens signaled last month that policy makers are monitoring confidence and retail sales to gauge whether demand will slow as the impact of A$20 billion ($17 billion) in government cash handouts to households wanes.

Sales at department-store chains such as David Jones Ltd. helped Australia’s economy expand 0.6 percent in the second quarter from the previous three months, when it grew 0.4 percent, a report showed on Sept. 2.

Retail sales rose 0.5 percent in July after falling 1.4 percent in June, a report may show tomorrow, according to the median forecast of 20 economists surveyed by Bloomberg News.

Surging confidence was reported across all businesses surveyed, with manufacturers more optimistic than any other sector, Oster said.

“While these outcomes are very encouraging, to some extent we suspect that current confidence levels may be starting to get to unrealistic levels -- just as they fell to overly pessimistic levels earlier in the year,” he added.

Business Conditions

National Australia’s business conditions gauge, a measure of hiring, sales and profits, rose 3 points to 4, the highest level since May 2008, today’s report shows.

Still, there are some signs that sentiment may ease in coming months. A gauge of employment fell 6 points in August to minus 11, close to the levels reported during the economic slowdown in 2001, Oster said. Forward orders fell 7 points to minus 2, and credit availability tightened.

“Despite improved sentiment, business is still very wary of investing in the current circumstances,” Oster said.

The economy’s expansion may slow in late 2009 as the central bank begins raising borrowing costs and unemployment climbs, today’s report said.

“The government’s cash handouts have been effective in preventing a major crash in consumption,” Oster said. “However, going forward we still expect consumption to weaken until early 2010.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: September 7, 2009 21:44 EDT