Australia to Leave Benchmark Rate at 7.25 Percent

By Jacob Greber

Aug. 4 (Bloomberg) -- Australia's central bank will probably leave its benchmark interest rate at a 12-year high amid signs rising unemployment will cool inflation that has surged above its target range.

Governor Glenn Stevens will keep the overnight cash rate target at 7.25 percent tomorrow in Sydney, according to all 24 economists surveyed by Bloomberg News. A separate survey shows employment growth probably slowed to 5,000 extra jobs in July from 29,800 in June.

Slower jobs growth adds to signs four interest-rate increases in 12 months are cooling Australia's $1 trillion economy. Record gasoline prices and declining stock values also are prompting consumers and companies to slash spending, offsetting a surge in income from iron ore and coal exports.

``Reserve Bank policy makers aren't ready to cut yet, but when they do, it's likely to be 50 basis points,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``The economy is seriously slowing.''

The Reserve Bank of Australia will announce its decision at 2:30 p.m. tomorrow in Sydney.

Policy makers have left borrowing costs unchanged since March, when they raised the benchmark rate for a second straight month to curb inflation.

Consumer prices jumped 4.5 percent in the second quarter from a year earlier as gasoline costs rose, a report showed last month. The central bank aims to keep annual inflation between 2 percent and 3 percent on average.

Consumer Confidence

Stevens said last month that the chances of keeping inflation ``low over the medium term are good.'' There is ``pretty clear evidence'' consumers and businesses are cutting expenditure, the governor said on July 16.

Since the bank's last meeting on July 1, reports show consumer confidence slumped in July to the lowest level in 16 years, retail sales fell in June by the most in six years, and lending to consumers and businesses rose at the slowest annual pace since 2002.

Home-loan approvals, which fell 7.9 percent in May, the most in eight years, probably dropped 2 percent in June, according to the median estimate of 21 economists surveyed by Bloomberg News. The government publishes its home-loan report at 11:30 a.m. on Aug. 6 in Sydney.

Rate Outlook

``It looks more likely now than it did a couple of months ago that this more moderate track for demand will continue,'' Stevens said on July 16. That will ``in due course begin to exert downward'' pressure on inflation, he said.

Investors have increased bets that the central bank will cut interest rates, according to a Credit Suisse Group index based on trading in interest-rate swaps.

Stevens will lower the benchmark rate by 68 basis points, or 0.68 percentage point, in the next 12 months, the index showed at 8:02 a.m. in Sydney. At the start of July, traders forecast 19 basis points of gains.

The Reserve Bank may cut its benchmark by as much as 3 percentage points by the end of 2009, said Stephen Koukoulas, a senior economist at TD Securities Ltd. in London.

``The collapse in the domestic economy appears to have gained breadth and momentum in recent months,'' Koukoulas said.

Job Losses

Qantas Airways Ltd., Australia's largest airline, said last month it will sack 1,500 workers, and meat processing company Don Smallgoods will cut 640 at factories in Perth and Melbourne.

Starbucks Corp., the world's largest chain of coffee shops, said July 29 it will close three-quarters of its 84 Australian stores, part of a plan to cut at least 12,000 jobs globally.

The jobless rate, which fell to a 34-year low of 3.9 percent in February, probably rose to 4.3 percent last month from 4.2 percent in June, according to the median estimate of 24 economists surveyed by Bloomberg News.

The government will publish the jobs report at 11:30 a.m. in Sydney on Aug. 7.

``The risk of recession is now very high,'' said Shane Oliver, senior economist at AMP Capital Investors in Sydney. ``The Reserve Bank should be cutting rates.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net