Australia May Consider Raising Rate to 4.5% in `Finely-Balanced' Decision

Australia’s central bank faces a “finely balanced” decision on whether to increase borrowing costs for the sixth time in seven meetings, as Governor Glenn Stevens weighs a near doubling of inflation against concerns about European debt.

The central bank will raise the overnight cash rate target to 4.5 percent from 4.25 percent tomorrow, according to 18 of 24 economists surveyed by Bloomberg News. Futures traders estimate a 56 chance of an increase when the decision is announced at 2:30 p.m. in Melbourne.

Stevens is under pressure to extend a world-leading round of rate gains as Australia’s economy accelerates to what he describes as its “trend” pace, stoking inflation and fueling house prices. Some economists say previous moves, which have boosted the benchmark rate from a half-century low of 3 percent, give Stevens leeway to delay an increase this month to gauge fallout from Greece’s debt turmoil.

“With domestic data and international developments pulling in different directions, the cash-rate decision will be finely balanced,” said Joshua Williamson, an economist at Citigroup Inc. in Sydney. Policy makers “need to lift” rates as underlying inflation remains above the central bank’s target range of 2 percent to 3 percent, he said.

Manufacturing growth accelerated in April to the fastest pace in almost eight years, adding to signs of an economic rebound, a report by the Australian Industry Group and PricewaterhouseCoopers showed today. The performance of manufacturing index jumped 9.3 points from March to 59.8.

Increased Bets

Investors are betting there is a 56 percent chance of a quarter-point increase in the benchmark rate, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 9:08 a.m.

Stevens, the first Group of 20 policy maker to raise borrowing costs twice this year, signaled last month that first- quarter inflation figures will be a key factor in helping policy makers decide their next move.

Growth 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 measure of so-called core inflation, the weighted-median, rose 3.1 percent from a year earlier.

It “doesn’t seem very likely” inflation will slip below the bank’s target amid rising raw-material costs, employment and fears about skills shortages, Stevens said on April 23.

‘Close to Trend’

“If the economy is growing close to trend, and inflation is close to target, one would expect interest rates to be pretty close to average,” Stevens said. Rates for home and business loans “are now pretty close to that average,” he said.

Inflation pressures may intensify as a result of the government’s planned overhaul of the tax system, announced in Canberra yesterday, which is estimated to increase Australian real wages growth by as much as 1.1 percent.

Faster inflation may also override concerns among policy makers about the Greek debt crisis, which shows signs of easing. Euro region ministers agreed to a 110 billion-euro ($146 billion) rescue package with the International Monetary Fund for Greece in Brussels yesterday to prevent a default.

“The board meeting will discuss the sour turn in global markets, but return to the strong” reports on Australian house prices and inflation, said Annette Beacher, an economist at TD Securities Ltd. in Singapore. Those signals “easily justify another prudent step” in raising borrowing costs, she said.

Greek Tragedy

Assistant Governor Guy Debelle said April 28 that the Greek fiscal crisis has been “fairly localized” to Europe and hasn’t affected Australian funding costs.

Unlike counterparts in Europe and the U.S., Stevens is 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.”

Higher interest rates are attracting funds to Australia, which has seen its currency rise 27 percent against the U.S. dollar in the past year. The dollar traded at 92.44 U.S. dollars at 9:05 a.m. in Sydney from 92.66 late last week.

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 field in Western Australia, potentially worsening a shortage of skilled workers that threatens to boost wage growth.

Mining Boom

Chevron said April 27 that it expects to employ more than 2,500 people in Australia by the end of the year, up from 1,800 now, and has awarded A$20 billion ($18.5 billion) in contracts for Gorgon.

Recent reports suggest households are weathering the central bank’s five rate increases since October, including the most recent rise which policy makers described as a “prudent” step given the economy’s strength.

Consumer confidence held close to its highest level in almost three years, according to a Westpac Banking Corp. survey of consumers last month.

House prices, which Stevens in March described as “getting quite high,” remain robust. A report today will show prices rose 18 percent in the last 12 months, according to the median estimate of 15 economists surveyed by Bloomberg News.

“The housing market has certainly taken the recent round of interest rate hikes in its stride,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “Given the recent bout of rate hikes, weakness in consumer spending and the overall fragile economic environment, the Reserve Bank shouldn’t rush the rate hiking process.”

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. Prime Minister Kevin Rudd distributed more than A$10 billion in cash to families in 2009 to boost consumer spending.

Tomorrow’s decision comes as Rudd is due to hold an election within 11 months. Australian political 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.

To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net

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