Australia Lifts Key Rate From 49-Year Low, Signals More to Come

By Jacob Greber

Oct. 6 (Bloomberg) -- Australia’s central bank unexpectedly raised its benchmark interest rate from a 49-year low and signaled further increases in coming months amid signs the economy is strengthening.

Reserve Bank Governor Glenn Stevens increased the overnight cash rate target to 3.25 percent from 3 percent in Sydney today. Only one of 20 economists surveyed by Bloomberg News forecast today’s move. The rest predicted no change.

The local currency jumped as Australia became the first Group of 20 nation to raise borrowing costs since the start of the global financial crisis more than a year ago. Rising job vacancies, retail sales and house prices, plus surging business and consumer confidence support Stevens’ view that the “basis for such a low interest rate setting has now passed.”

“It’s quite a pre-emptive move,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “They’re very comfortable the globe is returning to firmer growth, particularly Australia’s key trading partners in Asia.

‘‘There are a few more hikes ahead.”

The Australian dollar rose to 88.34 U.S. cents at 3:10 p.m. in Sydney from 87.62 cents just before the decision was announced. The two-year government bond yield gained 5 basis points to 4.40 percent. A basis point is 0.01 percentage point.

Governor Stevens, who cut the benchmark lending rate by a record 4.25 percentage points between September 2008 and April to cushion Australia against fallout from the global credit squeeze, said today that the economy is likely to expand “close to trend over the year ahead,” and inflation will remain near the bank’s target range of between 2 percent and 3 percent.

Risk Has Passed

“The risk of serious economic contraction” in Australia has passed, Stevens said in a statement.

“The board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” he added. “This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”

Today’s increase means households with an average-sized mortgage of A$250,000 ($221,000) will pay an extra A$40 a month in repayments.

Jane Counsel, a spokeswoman for Westpac Banking Corp., Steve Batten, a spokesman for Commonwealth Bank of Australia, and Luisa Ford, a spokeswoman for National Australia Bank Ltd., said the banks are currently reviewing their interest-rate settings. A spokesman for Australia and New Zealand Banking Group Ltd. was unable to comment immediately.

Global Rates

Speculation that Stevens would move faster than policy makers in the U.S., Europe and Japan to raise borrowing costs has helped stoke this year’s 26 percent gain in the nation’s currency.

Indonesia’s central bank kept interest rates unchanged for a second month yesterday and the European Central Bank will leave its benchmark rate at a record low of 1 percent on Oct. 8, according to analysts surveyed by Bloomberg. The U.S. Federal Reserve left the rate for overnight loans between banks at a record low of between zero and 0.25 percent on Sept. 24.

“The Reserve Bank has flagged there may be more to come,” Treasurer Wayne Swan told reporters in Canberra today. There is “no doubt” Australia’s economy is recovering.

Reports last week showed retail sales, approvals to build private homes, bank mortgage lending and property prices all jumped in August. Advertisements for job vacancies rose in September for a second straight month, gaining 4.4 percent.

‘Consumer Shock’

A report on Oct. 8 will show the unemployment rate rose to 6 percent last month from 5.8 percent, according to the median estimate of 20 economists surveyed by Bloomberg. By contrast, Europe’s jobless rate climbed in August to a 10-year high of 9.6 percent, and reached 9.7 percent in the U.S., the highest level since 1983.

“Overall, growth through 2010 looks likely to be close to trend,” Governor Stevens said. “Unemployment has not risen as far as had been expected.”

The bank’s decision will be “a shock for consumers in particular and those first-home buyers who have been borrowing pretty big,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, who forecast today’s move. “I think the Reserve Bank will move quite slowly” on future moves with quarter-point increases “every couple of months or so.”

Consumer spending, stoked by A$20 billion in government cash handouts to households, helped fuel a 1 percent expansion in Australia’s gross domestic product in the first half of this year.

Stock, House Prices

The government is also boosting domestic demand by spending an extra A$22 billion on roads, railways, ports and schools.

There are increasing signs the stimulus is starting to drive up asset prices. The nation’s benchmark S&P/ASX 200 index of stocks has surged more than 20 percent this year, and a report published on Sept. 30 by property monitoring company RP Data-Rismark showed house prices climbed 7.9 percent in the first eight months of this year.

“Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months,” Stevens said today.

The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will rise 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

“There’s a risk they’ve gone too early,” said Prasad Patkar, who helps manage about $1.2 billion at Platypus Asset Management in Sydney. “The recovery may not be all that well entrenched and yet they’re starting to unwind the stimulus.”

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