Australia Will Probably Leave Benchmark Rate at 7.25%

By Jacob Greber

June 30 (Bloomberg) -- Australia's central bank will probably leave its benchmark interest rate at a 12-year high as it assesses whether the economy is slowing enough to cool the fastest inflation in almost two decades.

Governor Glenn Stevens will keep the overnight cash rate target at 7.25 percent tomorrow in Sydney, according to all 25 economists surveyed by Bloomberg News. Six say the bank will raise the rate by the end of the year, and one forecasts a cut.

Slumping stock markets, record gasoline prices and rising borrowing costs have slashed consumer confidence and forced companies to trim spending and fire workers. Policy makers said a month ago it ``was important for the slowing trend to continue'' in Australia's $1 trillion economy, which grew in the first quarter at the weakest pace in almost two years.

``The bank should be starting to feel a bit more confident that the demand slowdown they're looking for is on track,'' said Shane Oliver, chief economist at AMP Capital Investors in Sydney. ``That will head off the need for another rate hike, regardless of the short-term threat to inflation coming from gasoline.''

The central bank has left borrowing costs unchanged since March, when it raised the benchmark rate by a quarter point for the fourth time in seven months.

The bank's board will announce its July decision at 2:30 p.m. in Sydney tomorrow.

The Australian dollar traded today near its highest in 25 years as prices of commodities the nation exports, from iron ore to coal, rose to records. The currency rose to 96.25 U.S. cents at 10:38 a.m. in Sydney from 96.20 cents late on June 27.

Global View

Australia's current interest rates ``are essential'' to restrain inflation, which poses a greater threat to the economy than the global credit crunch, Stevens said on June 13.

Monetary policy needs to damp domestic demand ``because inflation has already picked up,'' he said.

Steven's concern about accelerating inflation is being echoed by central banks around the world. The U.S. Federal Reserve kept its benchmark rate at 2 percent last week and warned faster inflation may accompany some strengthening of the economy. European Central Bank President Jean-Claude Trichet has left open the option of raising interest rates after July.

Surging fuel, food and housing costs pushed Australia's annual core inflation to 4.4 percent in the first quarter, the highest rate in almost 17 years. The central bank aims to keep price increases between 2 percent and 3 percent on average.

Building Approvals

Reports published since the bank's last meeting support Steven's view that the economy is slowing. Employment fell in May for the first time in 18 months, ending the longest run of monthly job gains since 1978, consumer confidence dropped in June and businesses remained pessimistic for a fifth consecutive month.

Home-building approvals probably fell 3.4 percent in May, the fourth decline this year, according to the median estimate of 24 economists surveyed by Bloomberg. A separate report may show retail sales rose 0.1 percent. The housing and retail sales figures will be published on July 2.

Consumer and investor sentiment is also being battered by crude oil prices, which hit a record $142.99 a barrel last week, and tumbling stock markets.

Australia's benchmark S&P/ASX 200 Index has slumped 16 percent this year, and the Dow Jones Industrial Average had its worst June since the Great Depression.

``The Reserve Bank can be a little more confident'' that this year's interest-rate increases are working, said Matthew Johnson, an economist at ICAP Australia Ltd. in Sydney. ``They know inflation is going to be high for a while, but their emphasis will be making sure this growth slowdown sticks.''

Bloomberg Survey

Following is a table of forecasts for the benchmark rate following the July 1 policy meeting and at the end of the third and fourth quarters and the first three months of 2009:

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Median 7.25% 7.25% 7.25% 7.25%
High 7.25% 7.50% 7.75% 7.75%
Low Forecast 7.25% 7.25% 7.00% 6.75%
No of replies 25 25 25 25
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Rate Q3 Q4 Q1
1-Jul-08 2008 2008 2009
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4cast 7.25% 7.25% 7.25% 7.25%
ANZ Bank 7.25% 7.50% 7.75% 7.75%
ABN Amro 7.25% 7.25% 7.25% 7.25%
AMP Capital 7.25% 7.25% 7.25% 7.25%
Ausbil Dexia 7.25% 7.25% 7.25% 7.00%
Barclays 7.25% 7.25% 7.25% 7.00%
BT Financial 7.25% 7.25% 7.25% 7.25%
Citigroup 7.25% 7.25% 7.25% 7.25%
Commonwealth Bank 7.25% 7.50% 7.50% 7.50%
Deutsche Bank 7.25% 7.50% 7.50% 7.50%
Goldman Sachs 7.25% 7.25% 7.25% 7.25%
ICAP Australia 7.25% 7.25% 7.50% 7.50%
JP Morgan Chase 7.25% 7.25% 7.25% 7.25%
Lehman Brothers 7.25% 7.25% 7.25% 7.25%
Macquarie 7.25% 7.50% 7.50% 7.50%
Merrill Lynch 7.25% 7.25% 7.25% 7.25%
National Australia 7.25% 7.25% 7.25% 7.00%
Nomura 7.25% 7.25% 7.25% 7.25%
RBC Capital 7.25% 7.25% 7.25% 7.25%
St. George Bank 7.25% 7.25% 7.25% 7.25%
Suncorp Banking 7.25% 7.25% 7.50% 7.50%
Thomson Reuters 7.25% 7.25% 7.25% 7.00%
TD Securities 7.25% 7.25% 7.00% 6.75%
UBS Australia 7.25% 7.25% 7.25% 7.00%
Westpac Bank 7.25% 7.25% 7.25% 7.25%
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To contact the reporter for this story:
[bn:PRSN=1] Jacob Greber [] in Sydney at
jgreber@bloomberg.net