Australia Unexpectedly Raises Key Rate Quarter Point
bloomberg.com
May 3 (Bloomberg) -- Australia's central bank unexpectedly raised its benchmark interest rate a quarter percentage point to the highest in more than five years to stem inflation. The nation's currency climbed.
Reserve Bank of Australia Governor Ian Macfarlane and his board today increased the overnight cash rate target for the first time in 14 months to 5.75 percent. Seventeen of 21 economists surveyed by Bloomberg News had forecast no change.
Macfarlane joins central bankers in the U.S., China, Europe and Southeast Asia in raising interest rates this year as global economic growth accelerates, pushing commodity prices to records. Australia's benchmark borrowing costs, now the highest since February 2001, could stall a rebound in Asia-Pacific's fifth-largest economy, which grew at its slowest in pace in four years in 2005.
``Today's decision will slow the recovery we've been seeing in retail sales and housing,'' said Shane Oliver, chief economist at AMP Capital Markets in Sydney. ``It will be a knock on the head for both.''
Australia's currency rose to a seven-month high against the U.S. dollar. It has climbed 7.4 percent in the past month, the largest gain of any currency against the U.S. dollar.
The Australian dollar bought 76.86 U.S. cents at 4:39 p.m. in Sydney from 76.12 cents before the decision was announced. The yield on the 6.25 percent bond maturing April 2015 gained 2 basis points to 5.78 percent. A basis point is 0.01 percentage point.
Inflation Risks
``The board judged that inflationary risks had increased sufficiently to warrant an increase,'' Macfarlane, who will retire in September after 10 years leading the bank, said in a statement. He said the underlying inflation rate of 2.75 percent in the first quarter had reached levels he wasn't expecting until the second half.
Australia's consumer price index, the government's main measure of inflation, rose 0.9 percent in the first quarter for an annual inflation rate of 3 percent. It gained 0.5 percent in the fourth quarter.
Australian Treasurer Peter Costello joined retailers and property developers in saying the rate increase could damp a recovery in consumer spending and housing.
``It was a line-ball call taken by the bank,'' Costello told reporters in Canberra. ``We are probably at the peak of the inflationary cycle.''
`Economy Killer'
Shares in Woolworths Ltd., Australia's largest grocery store chain, closed 30 cents, or 1.6 percent, lower at A$18.40 today in Sydney. Shares in National Australia Bank Ltd., Australia's largest lender, dropped 13 cents, or 0.4 percent, to A$37.24. The benchmark ASX/S&P 200 Index gained 0.4 points, or 0.01 percent, to 5273.
Today's rate increase will add about A$40 ($30) a month to repayments on an average mortgage of about A$250,000, according to the Housing Industry Association.
``A rate rise will be a killer on the economy,'' Andrew Boyes, chief financial officer at retailer Adidem Group Ltd., said in Melbourne. ``Higher petrol prices are really starting to bite demand, which is already pretty lackluster.''
Gasoline costs surged to a record A$1.34 a liter at the end of April as global oil prices rose. That equates to $3.90 a gallon.
Home-building approvals may decline by 3 percent this year because of the decision, said Brendan Crotty, chief executive officer of Australand Property Group, the nation's fourth-biggest real estate developer. ``Any further increase would be very damaging to the economy,'' Crotty said.
Lending Surges
Macfarlane said a surge in lending this year showed ``households and businesses have continued to find it attractive to borrow at prevailing interest rates.''
Lending to businesses jumped 17.3 percent from a year earlier in March, the fastest pace since September 1989, the central bank said last week. Loans to consumers to buy houses gained 13 percent.
``The aim of this rise is to cause consumers to stop spending and borrowing and it will work in that direction,'' said Stephen Koukoulas, chief Asia-Pacific strategist at TD Securities Ltd. in Sydney.
Australia's central bank joins others around the world in raising rates to curb inflation. The Fed has increased borrowing costs 15 times since June 2004 to a seven-year high of 4.75 percent.
The European Central Bank increased its benchmark rate by a quarter point in March to 2.5 percent. It meets tomorrow and is expected to keep the rate unchanged. China last week raised its lending rate for the first time since October 2004. Canada raised its key rate in April for a sixth consecutive meeting to 4 percent.
Central banks in Thailand and Malaysia have also raised rates this year.
Yield Gap
The gap in the yield between Australian two-year government bonds and similar-dated U.S. Treasury notes reached 80 basis points today, the widest in three months, from 73 basis points yesterday. The gap was 75 points at 4:38 p.m. in Sydney. Federal Reserve Chairman Ben Bernanke said last week he may stop raising rates after every Fed meeting.
Macfarlane is concerned wages growth will stoke inflation. Unemployment in Australia reached a 29-year-low 5 percent in March. Wages increased 4.2 percent in the fourth quarter from a year earlier.
``Wages growth, though not accelerating further recently, is higher than it was a year ago, and businesses are continuing to report that suitable labor is scarce,'' Macfarlane said.
Economic expansion in the nation's major trading partners may fuel faster growth in Australia, Macfarlane said.
China's economy expanded 10.2 percent in the first quarter from a year earlier. Australia supplies 43 percent of China's iron ore and more than 40 percent of its coal.
Export Outlook
The U.S. economy grew 3.5 percent in the first quarter from a year earlier. The economy of Japan, Australia's largest export market, expanded 4 percent in the fourth quarter from a year ago.
The above-average global economic growth ``suggests a strengthening in the outlook for Australia's export earnings, with consequent expansionary effects on incomes and spending,'' Macfarlane said.
Retail sales rose 0.7 percent in February, twice as much as economists expected, and housing finance jumped 1.1 percent. Consumer confidence was at a seven-month high in April. The economy grew 2.5 percent last year, the slowest pace since 2001. |
