Reserve Bank to Raise Borrowing Costs Once More in 2010, Citigroup Says

Australia’s central bank will raise borrowing costs only one more time this year amid signs the nation’s economic expansion won’t push the inflation rate above Governor Glenn Stevens’s target range, Citigroup Inc. said.

Stevens will boost the benchmark overnight cash rate target by a quarter percentage point to 4.75 percent in the fourth quarter, Sydney-based senior economist Paul Brennan said today. His previous prediction was for the benchmark rate to climb to 5.25 percent. The median estimate of 21 economists surveyed by Bloomberg is for a rate of 5 percent by the end of the year.

Economic growth was weaker than Citigroup expected in the first quarter after business investment fell, prompting Brennan to trim his forecast for gross domestic growth in 2010 to 3.25 percent from his previous prediction of 3.5 percent. Governor Stevens this week signaled that his decision to return borrowing costs to average levels has given policy makers “flexibility” to pause and gauge any fallout from Europe’s debt crisis.

“The RBA now has scope to pause for longer than we had previously thought likely,” Brennan said. “A period of steady lending rates through to later this year should underpin some improvement in confidence, benefiting both the consumer and housing construction.”

Brennan said one risk to Citigroup’s forecast is that the pause in interest rate increases may trigger a faster rebound in consumer sentiment and growth, “leading to higher inflation and renewed house price pressures.

“This in turn would force the RBA to tighten more quickly,” he said.

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

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