June 4 (Bloomberg) -- Australia's economy grew twice as fast as economists forecast in the first quarter, driving the nation's currency higher on speculation the central bank may raise interest rates for a third time this year.

Gross domestic product rose 0.6 percent from the fourth quarter, when it increased a revised 0.7 percent, the Bureau of Statistics said in Sydney today. The median estimate of 24 economists surveyed by Bloomberg News was for a 0.3 percent gain.

Household and government spending, as well as a jump in construction, is helping buttress the economy's 17-year expansion and the fastest inflation since 1991. Central bank Governor Glenn Stevens left the benchmark interest rate at 7.25 percent yesterday and signaled he was prepared to raise borrowing costs again if economic growth doesn't slow.

``This is a green light for another interest-rate increase this year,'' said Savanth Sebastian, an equities economist at Commonwealth Bank of Australia in Sydney. ``The record expansion continues despite the Reserve Bank of Australia's efforts to significantly slow the economy.''

The Australian dollar jumped to 95.54 U.S. cents at 1:19 p.m. in Sydney from 94.92 cents before the report was released. The yield on the two-year government bond climbed 12 basis points, or 0.12 percentage point, to 6.88 percent.

Rate Expectations

Traders see a 100 percent chance the Reserve Bank will raise interest rates by a quarter point by year end compared with 62 percent odds yesterday, 30-day interbank interest-rate futures contracts show.

Household spending contributed 0.4 percentage points to quarterly growth, today's report showed. Construction and national defense spending added 0.3 percentage points each.

Today's report suggests Australian consumers and businesses have weathered higher borrowing costs, record gasoline prices and a slump on the nation's stock market this year.

Underpinning the $1 trillion economy is a mining boom that has pushed unemployment close to the lowest in more than three decades as resources companies such as Rio Tinto Group boost hiring and expand mines, railways and ports to meet demand from China for iron ore and coal.

Australia's economy expanded 3.6 percent from a year earlier in the March quarter, today's report shows, outpacing the U.S. economy's 2.5 percent gain and the 2.2 percent expansion in the 15-countries that use the euro.

`Acute Inflation'

Concern that a record jobs boom will drive up wages was a key reason central bank policy makers increased borrowing costs in March for the fourth time in seven months. The bank aims to keep annual inflation, which reached 4.4 percent in the first quarter, to between 2 percent and 3 percent on average.

The first-quarter GDP figures ``show that inflationary pressures still remain acute,'' acting Treasurer Lindsay Tanner said today in Canberra.

``What the central bank has done so far has not had a significant impact on the economy,'' Commonwealth's Bank's Sebastian said. ``They will wait for the next inflation figures and we can expect another rate increase after that.'' The government publishes second-quarter inflation figures on July 23.

The nation's terms of trade, a measure of income from exports, is forecast by the central bank and government to rise 20 percent this year.

Trade Boom

The trade boom ``will add substantially to national income and ability to spend, even with the slowing in global growth to below-trend pace that the bank is assuming,'' Stevens said yesterday.

Iron ore output at BHP Billiton Ltd., the world's biggest miner, rose 22 percent to a record 28 million metric tons in the three months through March, the company said on April 23.

AWB Ltd., Australia's largest wheat exporter, said on May 21 that first-half profit rose 89 percent because of increased sales by its Landmark farm merchandize unit.

Construction and manufacturing added 0.2 percentage points to GDP in the first quarter, and mining, transport, finance and insurance contributed 0.1 percentage point, today's report shows. Agriculture, forestry and fishing detracted 0.1 percentage points.

Other reports suggest the economy may now be slowing. Business confidence slumped in April to the weakest level since the 2001 terrorist attacks in the U.S., and home-loan approvals declined in March to the lowest reading in almost three years.

Australia's All Ordinaries Index of stocks plunged 16 percent in the first quarter, the biggest decline since 1987, amid concern the U.S. housing recession is spreading to Europe and Asia, eroding growth in the nation's biggest export markets.

Retail Spending

The impact of rising interest rates and market volatility is being partially offset by the Australian currency's 8.8 percent gain this year against the U.S. dollar, helping increase domestic demand for imported goods.

Harvey Norman Holdings Ltd., the nation's biggest furniture and electronics retailer, said in May that sales rose 6.4 percent in the first four months of the year on demand for flat- panel televisions and iPods.

Spending on clothes and shoes jumped 2.9 percent in April, the biggest increase in 10 months, a report published this week showed. Department store sales jumped 1.9 percent.

The chain price index, a measure of retail prices in Australia's economy, climbed 3.1 percent in the first quarter from a year earlier, today's report showed.

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

Last Updated: June 3, 2008 23:42 EDT