Australia Raises Interest Rate for Sixth Time to 4.5%

MELBURNE, May 4 -- Australia's central bank increased the benchmark interest rate for the sixth time since early October after policy makers raised their outlook for inflation and judged the nation is insulated from Greece-sparked debt woes.

Australia's currency fell after Stevens said borrowing costs have returned to "average" levels, ending the monetary stimulus that helped the nation avoid the global recession. Stevens has led Group of 20 policy makers in boosting borrowing costs by 150 basis points in seven months as record mining investment stokes demand for workers and fuels inflation.     "Don't expect this pace of monetary policy tightening to continue in the months ahead," said Ben Dinte, an economist at Macquarie Group Ltd. in Sydney. Now that rates are moving toward average levels, policymakers have "some room to keep rates on hold in the next couple of months."

Australia's dollar fell against the U.S. currency by the most in a week, dropping to 92.15 U.S. cents at 4:02 p.m. in Sydney from 92.45 before the decision was announced. The nation's benchmark S&P/ASX 200 Index extended declines, slipping 0.9 percent to 4742.80.

Target Range

Stevens, unlike counterparts in the U.S. and Europe, is under pressure to extend a world-leading round of rate increases as Australia's economy accelerates, stoking inflation and property prices, which surged more than 20 percent in the 12 months through March.

The governor said inflation, which peaked in 2008, may not slow as much as earlier forecast and "now appears likely to be in the upper half" of the central bank's target range of 2 percent to 3 percent over the coming year.

By contrast, Stevens predicted three months ago that inflation "would be in line" with its target range. The central bank will publish its latest forecasts for inflation and economic growth on May 7.

Continued rate increases may pose a danger for Prime Minister Kevin Rudd's Labor Party, which has seen voter support slump to the lowest level since before taking power in 2007 and faces an election within a year. The government, which presents its annual budget next week, also faces a backlash from mining firms after announcing plans to levy a 40 percent "super tax" on the profits of resources companies.

Greek Turmoil

Today's decision also suggests policy makers are less concerned about factors such as Greece's debt turmoil, which Stevens cited as a reason for keeping rates unchanged in February. The European Central Bank yesterday said it would indefinitely accept Greek debt as collateral regardless of the credit rating, after European ministers and the International Monetary Fund at the weekend agreed on a 110 billion-euro ($145 billion) bailout plan.

"To date, there has been very little contagion outside Europe," Stevens said today.

As the risk of a serious economic contraction in Australia has "passed some time ago," policy makers have been adjusting the cash rate towards levels that "would be consistent with interest rates to borrowers being close to the average experience over the past decade or more," Stevens said today.

The pace of gains in Australia's consumer price index almost doubled in the first quarter to 0.9 percent from 0.5 percent in the previous three months, a report showed last week. A measure of so-called core inflation, the weighted-median, rose 3.1 percent from a year earlier.

Inflation Outlook

With Stevens citing "buoyancy" in the country's housing market and a surge in mining investment, further increases may yet be needed, said economist Su-Lin Ong.

"They have done quite a lot in the past six months, but the door is still open" to further moves, said Ong, a senior economist at RBC Capital Markets Ltd. in Sydney, who forecast today's increase. Just "because they are saying rates are around long-run averages doesn't rule out moves in the next couple of months."

Forecasts for higher borrowing costs come as Australia's political parties prepare for an election, due within the next 11 months. Australian leaders are vulnerable to rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

First-Home Buyers

More than 90 percent of mortgages taken out last year, when the benchmark rate was slashed and Rudd's government temporarily increased grants to first-time buyers of new dwellings to as much as A$21,000 ($19,500), were on variable rates.

The central bank has increased its benchmark rate by 150 basis points since early October, adding about A$3,600 a year to repayments on an average A$300,000 mortgage.

Treasurer Wayne Swan said the central bank's decision, while tough for families, means "rates are returning to more normal levels." Commonwealth Bank of Australia, the country's biggest bank, said today it will increase the rate on its variable home loan by 25 basis points to 7.36 percent on May 7.

Support for Rudd's government has fallen behind the opposition Liberal-National coalition for the first time since 2006, according to a Newspoll published today by the Australian newspaper.

Voter Support

The so-called two-party preferred vote for Labor dropped to 49 percent in the survey of 1,200 voters taken last weekend from 54 percent in mid April, and 52.7 percent when Rudd won in November 2007. The coalition's support rose to 51 percent from 46 percent. The margin of error is plus or minus 3 percent.

"Most people are focused towards the end of the year," Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. "At some time they've got go pause, and there are indications the economy is already starting to slow."

A measure of consumer confidence published on April 14 by Westpac Banking Corp. slipped 1 percent last month, and separate reports showed retail sales dropped 1.4 percent in February and home-building approvals slumped 3.3 percent.

Woolworths Ltd., Australia's biggest retailer, cut its annual sales growth forecast on April 30 in the absence of government cash handouts that stoked demand last year.

Still, Stevens is likely to remain among Asia-Pacific policy makers withdrawing monetary stimulus this year. Malaysia and India have boosted borrowing costs, while the New Zealand central bank said last week it expects to begin raising rates "in coming months."

Australia's economy, which skirted last year's recession, is being stoked by increased investment in resources projects such as Chevron Corp.'s Gorgon liquefied-natural-gas project in Western Australia, potentially worsening a shortage of skilled workers that threatens to boost wage growth.

"Australia's terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008," Stevens said today.