Australia Increases Rate to 12-Year High


Australia's central bank increased its benchmark interest rate for the second time in four weeks and said there are signs the highest borrowing costs in 12 years are prompting consumers and businesses to temper spending.

Governor Glenn Stevens and his board raised the overnight cash rate target by a quarter point to 7.25 percent in Sydney today, following adjustments in February, November and August to stem the fastest inflation since 1991.

Stevens said borrowing costs have risen ``substantially'' since mid-2007, sending the nation's currency tumbling as investors bet the bank won't increase rates again soon. Australia's first back-to-back increases in more than four years contrasts with the U.S., Canada and the U.K., which have cut rates to cushion their economies from slower global growth and credit market turmoil.

Australia's dollar fell to 92.87 U.S. cents at 4:38 p.m. in Sydney from 93.77 cents immediately before the decision, which was forecast by all 27 economists surveyed by Bloomberg News. The yield on the benchmark two-year government bond dropped 10 basis points to 6.56 percent. A basis point is 0.01 percentage point.

That's the largest gap in almost four years and may sustain demand for Australia's currency, which surged to a record 94.98 U.S. cents last week. Federal Reserve Chairman Ben S. Bernanke cut the U.S. interest rate in January by 125 basis points in the fastest easing of monetary policy since 1990.

Australia's 16-year economic expansion, stoked by booming exports of natural resources, has pushed the jobless rate to 4.1 percent, the lowest since 1974, and worsened a labor shortage that is driving up wages and inflation.

Recent reports suggest higher borrowing costs, as well concern that Australia's largest trading partners will be buffeted by slowing U.S. economic growth, may curb spending by consumers and business.


TradingEconomics.com, Bloomberg
3/4/2008 6:43:58 AM