Australia's Economy Will Slow on Rates, Fuel, Central Bank Says

By Jacob Greber

July 1 (Bloomberg) -- Australia's economic growth rate will slow as the highest borrowing costs in 12 years and record gasoline prices force households to cut spending, central bank Governor Glenn Stevens said. The nation's currency fell.

``While the inflation outlook remains concerning, the board's assessment continues to be that demand growth will be moderate this year,'' Stevens said today in Sydney.

The Reserve Bank left its benchmark interest rate at 7.25 percent for a fourth month as slumping stock markets, surging fuel prices and a drop in employment erode consumer confidence. The currency fell by the most in two weeks after Stevens said four rate increases between August and March should cool inflation ``over time'' from the fastest pace in almost 17 years.

``The Reserve Bank is signaling that it has done enough,'' said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. ``Slower growth will lead to slower inflation outcomes, but the process takes time.''

The Australian dollar fell to 95.60 U.S. cents at 4:37 p.m. in Sydney from 95.78 cents just before the decision was announced. The two-year government bond yield declined 3 basis points to 6.85 percent. A basis point is 0.01 percentage point.

``The board's judgment is that the current stance of monetary policy remains appropriate,'' Stevens said today. The bank's decision to leave the cash rate at 7.25 percent was forecast by all 25 economists surveyed by Bloomberg News.

Global Inflation

``Inflation is likely to remain relatively high in the short term and the consumer price index will be further boosted in coming quarters by the recent rises in global oil prices,'' Stevens said. ``Looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected.''

The governor's concern about price increases 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.

The government is due to publish second-quarter inflation figures on July 23.

Consumer Confidence

``The central bank seem to be preparing people for some pretty bad inflation numbers,'' said Matthew Hassan, a senior economist at Westpac Banking Corp. in Sydney. ``And they're implying that they would look through any short-term spike in inflation as long as demand continues to fall.''

Reports published since the bank's June 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 month.

The economy, which has been expanding for 17 years, grew 0.6 percent in the first quarter from the previous three months, the slowest pace in almost two years.

Goodyear Tire & Rubber Co, the U.S.-based tire maker, said last week it will close a Melbourne factory and fire 600 workers. Qantas Airways Ltd. the nation's largest carrier, announced plans last month to scrap regional routes and cut hundreds of jobs.

Lending to consumers and businesses by banks and other financial institutions rose in May at the slowest annual pace since November 2005, and borrowing for home loans grew by the least in 16 years, the central bank said yesterday.

Retail Sales

Home-building approvals fell 3.4 percent in May, the fourth decline this year, and retail sales rose just 0.1 percent, according to the median estimates of economists surveyed by Bloomberg. The housing and retail sales figures will be published tomorrow at 11:30 a.m. in Sydney.

Consumer and investor sentiment is also being battered by crude oil prices, which hit a record $143.67 a barrel yesterday, and tumbling stock markets.

Australia's benchmark S&P/ASX 200 Index has slumped 19 percent this year, and the Dow Jones Industrial Average had its worst June since the Great Depression.

A mining boom that is forecast to boost Australia's terms of trade, a measure of export earnings, by 20 percent this year is propping up economic growth. Demand from China has pushed prices for coal, iron ore and crude oil to records, bolstering profits for miners such as BHP Billiton Ltd. and Rio Tinto Group.

``There is still a fairly big question mark over whether demand will get a second wind from the terms of trade boost,'' Westpac's Hassan said. ``It's yet to be seen how much impetus that will impart on the economy late this year and into 2009.

``There is enough uncertainty to leave rates on hold.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
Last Updated: July 1, 2008 02:46 EDT