Australia’s Stevens to Keep Leading World in Increasing Rates

By Jacob Greber and Dan Petrie

Dec. 2 (Bloomberg) -- Australia’s Glenn Stevens will continue leading the world in raising interest rates, with economists predicting a record fourth straight increase at the central bank’s next meeting in February.

Reserve Bank Governor Stevens will boost the overnight cash rate target by another quarter point to 4 percent on Feb. 2, adding to yesterday’s unprecedented third monthly increase, according to all 16 economists surveyed by Bloomberg News.

Australia’s economy has outpaced the U.S., Europe and Japan, which have all kept rates near record lows this year. Cash handouts by Prime Minister Kevin Rudd’s government have boosted consumer confidence and house prices, and China’s demand for resources such as iron ore from Rio Tinto Group and BHP Billiton Ltd. has stoked a new mining-jobs boom.

“Reserve Bank officials are taking the path of least hazard,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, who tips another increase in February followed by further “steady” gains in 2010. “They are hiking while they have time on their side and the exit from emergency settings can be orderly.”

Traders aren’t as convinced. The nation’s currency fell yesterday after Stevens said the board’s “material adjustments” to the benchmark rate, now at 3.75 percent, will be enough to keep inflation within his 2 percent to 3 percent target range.

Investor Bets

Investors are betting there is only a 36 percent chance of an increase in February, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange late yesterday.

“I can see how people will interpret this is a pausing message -- and that’s more than fair,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “Nevertheless, I think there are several reasons why the Reserve Bank won’t be pausing for too long.”

Speculation that Stevens will continue to lead the world in raising rates has stoked this year’s 30 percent surge in the nation’s dollar, making it the best performer among the 16 major currencies against the U.S. dollar. It traded at 91.24 U.S. cents at 5:55 p.m. yesterday in Sydney.

U.S. Federal Reserve Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa aren’t expected to raise borrowing costs for at least a year, according to Bloomberg calculations based on overnight interest-rate swaps.

Japan Meeting

The Bank of Japan kept its key overnight lending rate at 0.1 percent at an emergency meeting in Tokyo yesterday, in which it said it will provide short-term loans to commercial banks amid pressure from Prime Minister Yukio Hatoyama’s administration to address falling prices and the yen’s surge to a 14-year high.

Australia’s economy is in a “gradual recovery” that will see gross domestic product expand 3.25 percent in 2010 and 2011, according to Governor Stevens. Growth is being boosted by A$22 billion ($20 billion) in spending by Prime Minister Rudd’s government on roads, ports, railways and schools.

By contrast, the U.S. economy will expand 2.5 percent next year, the euro region will advance 0.9 percent and Japan will grow 1.8 percent, the Organization for Economic Cooperation and Development predicted last month.

Asia’s largest economies also show signs of outperforming most developed countries. A report published yesterday showed China’s manufacturing growth held at the fastest pace in 18 months in November, aiding the rebound of the world’s third- biggest economy and Australia’s largest iron-ore customer.

India, South Korea

India’s economy grew 7.9 percent in the third quarter, the fastest expansion in 1 1/2 years, and South Korea’s exports rose 18.8 percent in November from a year earlier, the first gain in 13 months, reports showed in the past two days.

“In China and Asia generally, where financial sectors are not impaired, recovery has been much quicker to date and prospects appear to be for good growth in 2010,” Stevens said.

Economic recovery in the region is helping stoke demand for Australian resources such as iron ore, and in September prompted Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc to approve the nation’s single biggest investment project, the A$43 billion Gorgon natural-gas venture in Western Australia.

Rio Tinto and BHP Billiton boosted iron-ore production to a record in the third quarter to satisfy Chinese demand for steel, which helped exports surge 5 percent in September.

“Prospects for ongoing expansion of private demand, including business investment, have been strengthening,” Stevens said yesterday. “Growth in 2010 is likely to be close to trend and inflation close to target.”

House Prices

House prices have climbed 10 percent this year, employment rose in October, and companies surveyed by the Bureau of Statistics in a report published on Nov. 25 forecast investment of A$105 billion in the year ending June 30, 2010, which is 5.9 percent more than they estimated three months earlier.

This year’s interest-rate increases add about A$150 to monthly repayments on an average A$300,000 home loan, and may prompt consumers to trim spending that surged in the first half of the year after the government distributed more than A$20 billion in cash handouts to households.

The cost to some home borrowers will be even higher after Westpac Banking Corp., Australia’s second-largest lender, increased its standard variable home-loan rate by 45 basis points after yesterday’s central bank decision.

Stevens’s move “risks choking off higher retail spending,” said Margy Osmond, chief executive of the Australian National Retailers Association. “It was disappointing the bank didn’t wait until after Christmas.”

Dubai Turmoil

Yesterday’s decision also suggests Stevens is unmoved by the turmoil last week on global stock and credit markets after Dubai World, one of the emirate’s three main state-related holding companies, said it’s seeking to delay payments on $59 billion of debt.

“Financial markets have improved considerably during 2009, notwithstanding periodic setbacks, and capital flows into Asia and other emerging market regions have been picking up,” the Governor said.

A rebound in share prices and higher house prices have also caused “a noticeable recovery in household wealth,” he added.

The benchmark rate will be boosted to 5 percent by the fourth quarter of next year, according to the median estimate of economists surveyed by Bloomberg yesterday.

To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.netDaniel Petrie in Sydney at dpetrie5@bloomberg.net