Australia Raises Key Interest Rate to 4% on Recovery (Update3)

By Jacob Greber
March 2 (Bloomberg) -- Australia’s central bank resumed raising interest rates after a one-meeting pause, judging that faster-than-anticipated economic growth will allay concerns that European deficits may roil global confidence.
Reserve Bank of Australia Governor Glenn Stevens increased the benchmark overnight cash rate target to 4 percent from 3.75 percent in Sydney today, as forecast by 14 of 19 economists in a Bloomberg News survey. The rest saw no change. Stevens said rates should be closer to "average," which he last week signaled may be 75 basis points higher than today’s new level.
The biggest jobs boom in more than three years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis, Stevens said. Today’s decision indicated the economic figures outweighed concerns about global sovereign debt risks, which helped convince the RBA to stand pat last month.
"It seems they are determined to deliver a rate hike every couple of months or so," said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. Still, there is enough global risk "out there that they’d want to be a bit cautious about"
another move in April, he added. The RBA paused last month after sovereign-debt risks sparked by Greece sent the euro and emerging stock markets tumbling.

Currency Performance

The Australian dollar fell to 89.82 U.S. cents at 5:31 p.m.
in Sydney from 90 cents just before the decision was announced.
It has soared 42 percent against its American counterpart in the past year, making it the best performer among the most-traded currencies. The two-year government bond yield rose 2 basis point to 4.59 percent from 4.57 percent before the decision.
While most loan rates have climbed by close to a percentage point since the Reserve Bank began raising rates in October, "interest rates to most borrowers nonetheless remain lower than average," Stevens said.
Australia’s four biggest lenders all said borrowing costs are under review following the RBA’s decision.
Today’s increase by Stevens widens the gap between Australia’s cash rate target and the U.S. benchmark to 3.75 percentage points, the most since January 2009. The difference between the Australian and U.K. benchmarks is now 350 basis points, the widest since 1990. The spread has helped send the Australian dollar to a 25-year high versus the pound.

Retail Sales

The announcement came hours after the government reported retail sales climbed 1.2 percent in January from December, exceeding the forecasts of all 19 economists in a Bloomberg News survey. A separate report showed home-building approvals fell in January, affected by the Reserve Bank’s rate increases and a reduction in government grants to first-time buyers.
Evidence of faster growth convinced most economists in a Bloomberg News survey on Feb. 26 to predict today’s move, after a majority in an earlier Feb. 12 survey saw no change. Sovereign debt concerns have caused the euro to tumble since the start of the year and emerging stock markets to retreat.
"Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness," Stevens said. "Concerns regarding some sovereigns remain elevated."
Today’s move makes Stevens the first central banker from a Group of 20 economy to boost benchmark rates this year, after leading the way in presiding over three moves in the fourth quarter. The increases brought the rate up from a half-century low of 3 percent.

Global Context

Pressure is also mounting on central banks in Canada, India, Malaysia and Indonesia to lift borrowing costs soon. Malaysia’s economy grew a greater-than-forecast 4.5 percent last quarter from a year earlier, and a report yesterday showed Indonesia’s inflation was at a nine-month high. Canada’s expansion is the fastest since 2000, a report showed late yesterday.
By contrast, 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 rates. The Fed has kept its benchmark close to zero since late 2008. The European Central Bank’s rate is at a record low of 1 percent.
Australia’s economy probably grew the most in 1 1/2 years in the fourth quarter, boosted by A$22 billion ($20 billion) in spending by Prime Minister Kevin Rudd on roads and schools.
Gross domestic product 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. The figures will be released at 11:30 a.m. tomorrow.

Lending Rebounds

"Labor-market data and a range of business surveys suggest growth in economy may have already been at or close to trend for a few months," Stevens said today. Banks are becoming more willing to lend to businesses and "investment in the resources sector is very strong," he said.
GDP growth will quicken to an annual pace of 3.25 percent in the fourth quarter from 2 percent late last year, the Reserve Bank said in February.
"The rising rates are a symptom of a growing Australian economy," said Jason Teh, who helps manage $3.2 billion at Investors Mutual in Sydney. "The economy is growing and the RBA has to do something about it. It just came down to timing."
A month ago, Governor Stevens cited concern about sovereign debt in Europe and turmoil on global financial markets for keeping the benchmark rate unchanged, a move that confounded the forecasts of all 20 economists surveyed by Bloomberg predicting an increase.
Reports published since then suggest inflation pressures may strengthen as a worsening skills shortage boosts wages.

Job Market

Employers added 194,600 jobs in the five months through January, the most in more than three years, cutting the unemployment rate to an 11-month low of 5.3 percent.
Business investment jumped in the fourth quarter at almost three times the pace predicted by analysts as companies raised forecasts for investment plans to a five-year high, a report showed last week.
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.
Commodity exports may jump next fiscal year by 15 percent to A$187 billion, the second-highest level on record, the Canberra-based Australian Bureau of Agricultural and Resource Economics said today in a report.
Chevron, Exxon Mobil 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.

Tightening ‘Process’

"The board judges that with growth likely to be close to trend and inflation close to the target over the coming year, it is appropriate for interest rates to be closer to average,"
Stevens said. "Today’s decision is a further step in that process."
The central bank’s so-called annual weighted-median gauge of core inflation rose 3.6 percent in the three months through December. The measure has held above the top of the bank’s target range of between 2 percent and 3 percent since the third quarter of 2007.
"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."
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.
Today’s rate increase means households with a A$300,000 mortgage will be charged an extra A$50 a month if commercial lenders raise borrowing costs by the same level, adding to the A$150 increase in monthly payments last quarter.