Australia to Raise Interest Rate to 12-Year High, Survey Shows

Australia's central bank will probably increase interest rates to a 12-year high to cool an economic expansion stoking the fastest inflation in almost two decades. ( Bloomberg )

Governor Glenn Stevens will raise the overnight cash rate target by a quarter point to 7.25 percent, adding to last month's increase, according to all 27 economists surveyed by Bloomberg News. The economy, now in its 17th year of expansion, probably grew 0.8 percent in the fourth quarter from the previous three months, a separate survey showed.

Accelerating inflation, stoked by a shortage of skilled workers and rising fuel prices, is forcing Stevens to raise rates as counterparts in the U.S. and the U.K. signal cuts to cushion their economies from slower growth. Australian company profits probably climbed in the fourth quarter and retail sales rose for an eighth month in January, reports will show this week.

``The downside risks to growth from tightening policy pale in comparison to the upside risks to inflation'' of leaving rates unchanged, said Mark Rodrigues, a senior economist at Australian & New Zealand Banking Group Ltd. in Melbourne. ``Demand continues to run well ahead of productive capacity.''

Tomorrow's rate adjustment would be the first back-to-back monthly increase in more than four years. It would also mark a 12th boost since May 2002, when the rate was 4.25 percent. Policy makers will announce the decision at 2:30 p.m. in Sydney tomorrow.

A quarter-point increase would also widen the gap between the Australian and U.S. benchmark rates to 4.25 percentage points, the largest in almost four years. That will fuel demand for Australia's currency, which surged to a record against the U.S. dollar last week.

Concern that the lowest unemployment in 33 years is driving up wages was a key reason central bank policy makers considered raising the benchmark rate by 50 basis points for the first time in eight years at the February meeting, according minutes published last month.

``Additional tightening could be implemented at the March and/or subsequent meetings as judged necessary,'' the minutes said.

Board members ``were strongly of the view that a significant slowing in demand from the pace observed through 2007 would be required for inflation to return to the target'' of between 2 percent and 3 percent, the minutes said.

Gains in underlying inflation have exceeded the central bank's target for two consecutive quarters.

Core inflation, which excludes the most volatile items in the consumer price index, accelerated to 3.8 percent in the fourth quarter, the fastest pace since 1991.

The central bank forecast last month that inflation will remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies such as miner Rio Tinto Group to expand and hire more workers. The jobless rate fell to 4.1 percent in January.

``The risk of inflation remaining uncomfortably high for some time is considerable,'' the bank said on Feb. 11. ``Labor market conditions are tight and there is some evidence of higher growth in aggregate wages in the most recent period.''

Bottlenecks at ports and railways are adding to inflation pressures, economists say.

Australia's current account deficit probably widened to a record A$17.8 billion ($16.8 billion) in the fourth quarter as transport bottlenecks limited overseas shipments of commodities, according to the median estimate of 23 economists surveyed by Bloomberg. The government releases the current-account report at 11:30 a.m. in Sydney tomorrow.

E probably slowed to 0.8 percent in the fourth quarter from 1 percent in the previous three months, according to the median estimate of 24 economists surveyed. The economy probably expanded 3.8 percent from a year earlier.

``While this would represent a modest slowing from the previous quarter's annual growth of 4.3 percent, this is unlikely to provide much comfort for the Reserve Bank,'' said ANZ Bank's Rodrigues.

Retail sales rose 0.5 percent in January, matching the increase in December, according to the median estimate of 24 economists in a separate survey.

Company profits gained 2 percent in the three months through December from the previous quarter, when they fell for the first time in more than two years, according to the median estimate of 21 analysts.

Business profits will be released at 11:30 a.m. today in Sydney. The retail-sales report is out tomorrow and GDP data on March 5.

Telstra Corp. Ltd. and Qantas Airways Ltd. are among companies benefiting from economic growth. Telstra, the nation's largest telephone company, reported last month that first-half profit beat analysts' estimates. Earnings doubled at Qantas, Australia's biggest airline.

Recent reports suggest higher borrowing costs, as well concern that Australia's largest trading partners will be buffeted by slowing U.S. growth, may be start to curb spending by consumers and business.

An index of Australia's leading growth indicators fell in December for the first time in almost three years, business confidence slumped in January to the lowest since the September 2001 terrorist attacks in the U.S., and consumer sentiment fell in February to a 15-month low.

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