Australia's central bank increased its benchmark interest rate a quarter percentage point to an 11-year high today to quell inflation sparked by an accelerating domestic economy and increases in fuel and food costs.
Governor Glenn Stevens and his board raised the overnight cash rate target to 6.75 percent, the second adjustment in three months, as expected by all 27 economists surveyed by Bloomberg News. Twenty-two analysts forecast another increase by March.
Australia's economy is in its 16th year of expansion, pushing the jobless rate to the lowest in three decades and stretching resources at a time when oil and other commodity prices are surging worldwide. Stevens becomes the first governor to raise borrowing costs during an election campaign, and higher rates may curb consumer confidence and dent Prime Minister John Howard's chance of winning the Nov. 24 poll.
``The economy is at full stretch and we are starting to see real pressure on prices,'' said Aubrey Zelinsky, managing director of Franklins, a chain of 77 Australian supermarkets owned by South Africa's Pick'n Pay Stores Ltd.
``That'll flow through to two interest-rate rises this year,'' he said in an interview from Sydney. ``It's a matter of taking the medicine now to ease the pain rather than leaving it until it's too late.''
The Australian dollar traded at 93 U.S. cents at 9:38 a.m. in Sydney from 92.84 cents just before the decision was announced. The yield on the benchmark 10-year bond fell 2 basis points to 6.22 percent. A basis point is 0.01 percentage point.
``The board judged that a further increase in the cash rate was needed now in order to contain inflation in the medium term,'' Stevens said in a statement. ``Reports of high capacity usage and shortages of suitable labor persist.''
Speculation of a rate increase intensified after an Oct. 24 report showed underlying consumer prices jumped by the most in 16 years in the third quarter. That pushed the annual weighted-median measure of core inflation to 3.1 percent, breaching the 3 percent limit of the central bank's target band.
``Not only is Australia's economy very strong, but inflation pressures are building around the world,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney.
Economies from South Korea to France have reported a pickup in inflation as costs of fuel and food surge. The price of oil climbed beyond $96 a barrel for the first time last week, while wheat and milk prices are close to record levels.
``Stevens had little choice and there are risks he'll be forced to increase rates again in February,'' Walters said.
Today's adjustment may be unpopular among voters with mortgages, adding A$42 ($39) a month to repayments on an average home loan. Households are carrying record debt of 161 percent of disposable income.
It's the sixth rate increase since Howard, 68, won the 2004 election with a promise to keep interest rates at ``record lows,'' and may negate his claim that he is a better economic manager than opposition Labor Party leader Kevin Rudd, 50, who is leading opinion polls.
Labor holds a six-point lead in voter support over the Liberal-National coalition, according to the latest Newspoll published yesterday. The poll had a margin of error of plus or minus 2.5 percentage points. Howard's approval rating in recent polls has been at the lowest since he won power.
The difference between Australia's interest rate and the Federal Reserve's benchmark climbed to 2.25 percentage points today, the widest gap in more than two years, which may drive further gains in the local currency.
Australia's dollar has surged almost 17 percent against its U.S. counterpart this year, reaching a 23-year high of 93.43 U.S. cents on Oct. 31.
Stephen Koukoulas, global strategist at Toronto-Dominion Bank in London, forecasts the currency will be one-for-one with the U.S. dollar by the end of 2008.
The A$1 trillion ($923 billion) economy has so far weathered fallout from the U.S. housing recession and resultant credit-market slump that prompted the Fed to cut interest rates last week.
Asia's appetite for commodities is driving a mining boom in Australia, the world's biggest exporter of coal, iron ore and wool. Income-tax cuts, jobs growth and rising wages stoked an 8.2 percent increase in retail spending in September from a year earlier, the biggest gain in more than three years.
Economic growth accelerated to 4.3 percent in the second quarter from a year earlier, the fastest annual rate since 2004. Third-quarter figures are released next month.
``At the moment, consumer spending is robust,'' Keith Perkin, chief executive officer of Retravision Pty., which has more than 450 electronics stores across Australia and New Zealand, said in an interview from Sydney. ``One rate rise won't make much of a difference, but if there are further increases, that will affect consumers.'' ( Bloomberg )