May 5 -- Australia's central bank probably will keep interest rates
unchanged for a second month to gauge whether the highest borrowing
costs in 12 years are slowing the nation's economy enough to cool the
fastest inflation since 1991.
Governor Glenn Stevens will leave the overnight cash rate target at
7.25 percent tomorrow in Sydney, according to 24 of 25 economists
surveyed by Bloomberg News. One forecasts a quarter- point increase.
The central bank raised interest rates in March for the fourth time in
seven months after inflation surged above the 3 percent limit of its
target range. Re****ts in the past month show consumer and business
confidence have slumped, while retail sales and home building have
slowed.
``Interest rates are at or near their peaks,'' said Craig James, chief
equities economist at Commonwealth Bank of Australia Ltd. ``Higher-
than-expected inflation figures justify another lift in rates, but
there are a few more signs that recent rate hikes are working to slow
the economy.''
Most economists surveyed by Bloomberg News say Stevens will leave the
benchmark rate unchanged for the rest of this year as slower household
and business spending bring annual inflation back within his target
range of between 2 percent and 3 percent. He raised borrowing costs in
March and February.
Stevens will announce the bank's decision at 2:30 p.m. in Sydney
tomorrow.
Core Inflation
Surging gasoline, food and housing costs helped push core annual
inflation to 4.4 percent in the first quarter, the highest rate in
almost 17 years, a re****t showed on April 23.
An index measuring inflation rose at a record pace in April as costs
for gasoline, health services and rents surged. Consumer prices
climbed 4.3 percent from a year earlier, according to a gauge
published by TD Securities Ltd. today.
Higher borrowing costs, as well as tighter credit standards for more
risky borrowers, are working to ``foster the moderation in demand
growth that was needed to ease the pressure on inflation,'' the
central bank said on April 15.
The bank will lower its forecasts for economic growth and inflation
when its quarterly policy statement is released on May 9, Stevens said
at his half-yearly testimony to parliament's economics committee in
Sydney on April 4.
``Higher interest rates and costs for staple items are forcing highly
leveraged consumers to reorganize spending priorities,'' said Joshua
Williamson, an economist at TD Securities Ltd. in Sydney. ``Despite
the threat of high ongoing inflation,'' the chances of Stevens cutting
rates ``shouldn't be underestimated,'' he said.
Losing Momentum
Recent re****ts suggest the $1 trillion economy's 17th year of
expansion is losing momentum. March home-building approvals fell six
times as much as economists forecast, sales of newly built houses
dropped for a second month, consumer confidence plunged in April to
the lowest since 1993, and companies remained pessimistic for a third
month in March.
Global Rates
Australia's central bank has raised borrowing costs 12 times since May
2002, when the rate was 4.25 percent. By contrast, Federal Reserve
Chairman Ben S. Bernanke lowered the benchmark U.S. interest rate by a
quarter point to 2 percent last week, the seventh cut since September.
The U.K. and Canada have also cut rates this year.
Concern that the lowest unemployment rate in 33 years is driving up
wages was a key reason Australian policy makers raised borrowing costs
in March.
The Reserve Bank forecast in March 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 in Australia.
The jobless rate probably held at 4.1 percent in March after employers
added 10,000 workers, according to a survey of 25 economists. The
unemployment re****t will be released on May 8
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