03/03/2010 (11:57 pm)
Australia May Increase Interest Rates, Economists Say
Australia may resume leading the world in raising borrowing costs, increasing the benchmark interest rate for the fourth time in five meetings, economists say. Traders aren’t so sure.
Governor Glenn Stevens will boost the Reserve Bank of Australia’s overnight cash rate target to 4 percent from 3.75 percent, according to 14 of 19 economists surveyed by Bloomberg. Futures traders estimate a 54 percent chance of an increase when the decision is announced at 2:30 p.m. tomorrow in Sydney.
Australia’s economy probably grew the most in 1 1/2 years in the fourth quarter, a separate analyst’s survey ahead of a report on March 3 shows, boosted by A$22 billion ($20 billion) in spending by Prime Minister Kevin Rudd on roads and schools. Concerns about sovereign debt in Europe and financial markets turmoil may prompt Stevens to wait another month, some economists say.
“Tomorrow’s decision is close to a coin toss,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney and the only analyst surveyed by Bloomberg who correctly predicted Stevens’ first rate increase in October. “Rates need to go up, but if they don’t it’s because there’s uncertainty about how the consumer will hold up, sovereign debt, and weak data out of the U.S.”
Group of 20
Boosting the benchmark rate tomorrow would make Stevens the first central banker from a Group of 20 economy to raise borrowing costs this year. He was the first in the world to increase rates three times last quarter, when he raised the key rate in three quarter-point steps to 3.75 percent from a half- century low of 3 percent.
By contrast, the U.S. Federal Reserve Chairman Ben S. Bernanke said last week the world’s largest economy is in a “nascent” recovery that still requires low interest rates. The Fed has kept its benchmark rate close to zero since late 2008. The European Central Bank’s rate is at a record low of 1 percent.
A rebound in Australian consumer confidence, higher business optimism, surging house prices, a drop in unemployment, and signs of an investment boom in resources projects such as Chevron Corp.’s Gorgon natural gas field off Western Australia are forecast by the central bank to fuel an acceleration in Australia’s economy, one of few to skirt last year’s recession.
Australian manufacturing expanded last month at the fastest pace in more than two years, a report showed today. The performance of manufacturing index increased 2.8 points from January to 53.8, Australian Industry Group and PricewaterhouseCoopers said.
‘Gentle Retreat’
Gross domestic product probably rose 0.9 percent in the fourth quarter from the previous three months, when it gained 0.2 percent, according to the median estimate of 18 economists surveyed by Bloomberg News. The economy probably expanded 2.4 percent from a year earlier, they said. The figures will be released at 11:30 a.m. on March 3.
“With the shrinking unemployment rate and the likely rebound in December-quarter GDP, we are convinced that another gentle retreat from the accelerator is required,” said Annette Beacher, an economist at TD Securities Ltd. in Singapore.
A report published last week showed business investment jumped in the fourth quarter at almost three times the pace predicted by analysts as companies raised their forecasts for investment plans to the highest level in five years.
Chinese Demand
BHP Billiton Ltd., the world’s largest mining company, said last month it will increase capital spending on iron-ore mines and oil fields by 63 percent next year to $20.8 billion from $12.8 billion this year.
Rising Chinese demand for Australian iron ore and coal is stoking a record boom in mining investment that may last more than a decade, central bank Deputy Governor Ric Battellino said on Feb guaranteed online payday loans. 23. Investment in new mines, ports and infrastructure may reach 6 percent of GDP, more than double the amount spent during the last resources boom in the late 1970s, he said.
Chevron, Exxon Mobile Corp. and Royal Dutch Shell Plc have this year begun construction on the A$43 billion Gorgon natural- gas venture, the nation’s single-biggest investment project that is forecast to generate as many as 10,000 jobs.
The economy has less scope than previously expected for “robust” growth that doesn’t stoke inflation, Governor Stevens told a parliamentary committee in Canberra on Feb. 19. “Monetary policy must therefore be careful not to overstay a very expansionary setting.”
House Prices
While inflation in Australia cooled in 2009 amidst the global recession, the central bank has pointed to accelerating house prices as a key reason for boosting borrowing costs last quarter.
House prices jumped 11.8 percent in the year through January, according to a Feb. 26 report by real-estate monitoring company RP Data-Rismark, whose figures are used by the central bank in its quarterly monetary policy statement.
Retail sales rose 0.5 percent in January after falling in December for the first time in five months and building approvals gained for a third straight month, according to Bloomberg surveys of analysts ahead of reports to be released tomorrow.
“Australia’s economy is in much better shape than was anticipated when rates were cut to a generation low a year ago,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. “I’ll be very surprised if the Reserve Bank doesn’t decide to continue its ‘normalization’ process” tomorrow.
“After all, it has already paused for nearly 90 days having hiked three times in just 60 days,” he said.
Not Convinced
Still, not all investors are convinced that Stevens and his board will boost borrowing costs in tomorrow’s announcement.
Traders are betting there is a 54 percent chance of a quarter-percentage-point rate increase, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 8:55 a.m.
Reports published late last week have stoked speculation that the global recovery will be hampered by weak growth among the world’s biggest economies.
Confidence among households and companies in the 16-nation euro economy fell and bank loans to the private sector declined for a fifth month, plus Standard & Poor’s said Feb. 25 that it may soon downgrade Greece again as the country grapples with the region’s largest budget shortfall.
The number of Americans filing first-time claims for unemployment insurance unexpectedly rose last week, the Labor Department said in Washington.
That contrasts with Australia where reports published last month showed business confidence rebounded and employers added 194,600 jobs in the five months through January, the biggest increase in more than three years that has cut the unemployment rate to an 11-month low of 5.3 percent.
“If anyone is going to boom, surely it’s Australia,” Gerry Harvey, chairman of Australia’s largest electronics retailer Harvey Norman Holdings Ltd., said in a Feb. 26 interview. “We never really went into a recession at all. Our unemployment rate was projected to reach 7, 8, 9, or 10 percent, but it never even got to 6 percent.”
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