Australia’s central bank will decide tomorrow whether higher interest rates are needed to avert faster inflation amid signs that past increases are cooling the nation’s property market.
The Reserve Bank of Australia will raise the overnight cash rate target to 4.75 percent from 4.5 percent, 19 of 25 economists surveyed by Bloomberg News said. Futures traders estimated a 60 percent chance of a move, contracts showed at 5 p.m. in Sydney. The decision is scheduled for 2:30 p.m. tomorrow.
Governor Glenn Stevens signaled last month the biggest mining boom in more than a century may prompt him to extend the most aggressive round of rate increases by a Group of 20 member to prevent a build-up of inflation pressures. Policy makers have left the rate unchanged since May, citing European debt concerns that eased last month, fueling the biggest gain in the MSCI World Index since the financial crisis subsided in April 2009.
“It’s a knife-edge decision,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. “There’s not a huge amount of recent domestic data to argue for an immediate rate hike, but the RBA has been aggressive in its signaling. They’re clearly itching to go.”
Speculation intensified in recent weeks that Stevens will boost borrowing costs before the end of the year, helping fuel an 8.6 percent surge in Australia’s currency last month and pushing it toward parity with its U.S. counterpart. The local dollar is the best performer among the 16 most actively traded currencies over the past 12 months.
“If downside possibilities do not materialize, the task ahead is likely to be one of managing a fairly robust upswing,” Stevens told a forum in the regional city of Shepparton in Victoria state on Sept. 20. “Part of that task will, clearly, fall to monetary policy.”
Economic growth is forecast to accelerate by the RBA as demand from China for iron ore and energy spurs investment spending by companies such as Chevron Corp., which is building the A$43 billion ($41.7 billion) Gorgon liquefied natural gas project in Western Australia.
The boom is also fueling a hiring surge that threatens to stoke wage inflation, which the central bank aims to keep between 2 percent and 3 percent. An annual gauge of what the RBA calls core inflation, the weighted median, was 2.7 percent in the second quarter.
Australia’s jobless rate was 5.1 percent in August, matching the lowest level since January 2009. RBA Assistant Governor Philip Lowe said last month the jobless level is “almost at what would be considered full employment.”
There are signs of weaker spending by consumers, who account for more than half of gross domestic product, after policy makers increased the benchmark lending rate in six quarter percentage point steps to 4.5 percent in May from a half-century low of 3 percent in October, 2009.
Home-building approvals fell in August by the most in three months, credit growth stalled, manufacturing contracted in September for the first time this year and consumer confidence declined, recent figures showed.
A report showed last week that manufacturing in China, Australia’s largest trade partner, expanded at the fastest pace in four months in September, adding to signs that economic growth there is stabilizing even as the government curbs energy use and tries to cool the property market.
Citigroup’s Williamson is among analysts that expect Stevens to add as much as 1 percentage point to the benchmark rate over the next 12 months. By contrast, the U.S. Federal Reserve, which has kept its main rate at a record low since December 2008, has said it’s willing to ease monetary policy further to spur growth.
Higher Australian borrowing costs would further restrain the local property market, which the RBA said last week shows “welcome signs” of cooling. The bank’s six increases to date added about A$3,600 a year to repayments on an average A$300,000 mortgage.
Treasurer Wayne Swan said today there isn’t “any justification” for Australian lenders to boost their mortgage rates by more than the central bank’s potential move. “Banks are making healthy profits at the moment,” he said in a radio interview with the Australia Broadcasting Corp.
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