Australia Probably Will Keep Interest Rate Unchanged at 6.25%

Australia's central bank board will probably decide today to keep interest rates unchanged because accelerating economic growth has yet to fan inflation.

Reserve Bank of Australia Governor Glenn Stevens will leave the overnight cash rate target at a six-year high of 6.25 percent when he announces the board's decision at 9:30 a.m. tomorrow in Sydney, according to 26 of 27 economists surveyed by Bloomberg News. One expects an increase.

Stevens, in his first public comments since February, said last month the bank has ``additional time'' to respond to a pickup in economic growth and a jobs boom after consumer prices rose less than expected in the first quarter. Most economists predict higher borrowing costs by March 2008.

``There is just no catalyst for a move here and now,'' said Bob Cunneen, senior economist at AMP Capital Investors in Sydney. ``March-quarter consumer prices were modest, so now it's all eyes on the next CPI report.''

The bank's three interest-rate increases last year have pulled inflation back into its target range even as a 33-year-low jobless rate buoys consumer confidence and economic growth.

Annual inflation was 2.4 percent in the first quarter, the first time in a year it has been within the bank's target range of between 2 percent and 3 percent. The second-quarter consumer prices report will be released on July 25.

Australia's economic growth accelerated to 1.6 percent in the first quarter from the previous three months, the fastest pace in more than three years, buoyed by consumer spending and business investment.

`Quite Significant'

Rising demand may eventually push the inflation rate back above the central bank's limit.

``We have some remaining quite significant concerns about medium-term inflation,'' Stevens said on June 14. ``But we know how to respond to that, and it'll be a matter of judging how much response may be needed.''

Australian employers hired four times as many workers as economists expected in May, worsening a labor shortage that may drive wages higher. Jobs growth over the past year has been the strongest in 18 years. The unemployment rate dropped to 4.2 percent, the lowest since 1974.

``With domestic demand and price pressures likely to accelerate in the year ahead, the case for the Reserve Bank to increase interest rates yet again is strengthening,'' said Amber Rabinov, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Twenty-two of 27 economists surveyed by Bloomberg News expect interest rates will be higher by the end of the first quarter of 2008. Ten forecast a rate increase this year.

Global Rates

The Reserve Bank raised its benchmark interest rate by a quarter percentage point in May, August and November last year as it joined other central banks in seeking to tame inflation with higher borrowing costs.

Policy makers are concerned that the fastest sustained global economic expansion in 30 years will fuel wage and price increases as companies operate at full capacity and unemployment drops.

The European Central Bank, the Bank of Japan, the People's Bank of China and the Bank of England have all indicated that further rate increases may be in the pipeline this year, while economists at Merrill Lynch & Co. and Goldman Sachs Group Inc. now expect the U.S. Federal Reserve to leave rates at a six-year high rather than cut them.

Australia's benchmark interest rate compares with 5.25 percent in the U.S., 5.5 percent in the U.K. and 4 percent for the 13 nations sharing the euro currency.

Bloomberg Survey

Following are economists' forecasts for the overnight cash rate target after the Reserve Bank's July meeting, the chance of a July rate increase, the rate at the end of 2007 and at the end of the first quarter of 2008:

Rate by End of: July Chance 2007 1Q 2008
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Median 6.25% 15% 6.25% 6.50%
High Forecast 6.5% 65% 6.50% 6.75%
Low Forecast 6.25% 0% 6.25% 6.00%
No. of replies 27 27 27 27
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4Cast 6.25% 5% 6.25% 6.25%
ABN Amro 6.25% 15% 6.25% 6.25%
AMP Capital 6.25% 20% 6.25% 6.25%
ANZ Bank 6.25% 15% 6.25% 6.50%
Ausbil Dexia 6.25% 25% 6.25% 6.50%
Barclays Capital 6.25% 10% 6.50% 6.75%
BT Financial Group 6.25% 8% 6.50% 6.50%
Citi 6.25% 20% 6.25% 6.50%
Commonwealth Bank 6.25% 20% 6.50% 6.50%
Deutsche Bank 6.25% 0 6.25% 6.50%
Goldman Sachs 6.25% 40% 6.50% 6.50%
Grange Securities 6.25% 15% 6.50% 6.75%
HSBC Australia 6.25% 20% 6.25% 6.75%
ICAP Australia 6.25% 10% 6.25% 6.25%
JPMorgan Chase 6.50% 65% 6.50% 6.75%
Macquarie Bank 6.25% 1% 6.50% 6.75%
Merrill Lynch 6.25% 0% 6.25% 6.50%
National Australia 6.25% 1% 6.25% 6.25%
Nomura Australia 6.25% 25% 6.25% 6.50%
RBC Capital Markets 6.25% 10% 6.25% 6.50%
Societe Generale 6.25% 40% 6.5% 6.75%
St.George Bank 6.25% 5% 6.25% 6.50%
Suncorp 6.25% 20% 6.25% 6.50%
TD Securities 6.25% 10% 6.50% 6.75%
Thomson IFR 6.25% 30% 6.50% 6.75%
UBS Australia 6.25% 10% 6.25% 6.50%
Westpac Bank 6.25% 10% 6.25% 6.50%
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source:bloomberg.com