Australia Keeps Key Rate Unchanged

Australia's central bank left interest rates unchanged for a second month, saying there is mounting evidence the highest borrowing costs in 12 years will slow the economy enough to cool the fastest inflation since 1991., Bloomberg 5/6/2008 6:50:26 AM

Today's decision indicates policy makers judged four interest rate increases in seven months will bring inflation back under the bank's 3 percent limit after reports in the past month showed consumer and business confidence have slumped, retail sales have slowed and home building has fallen. ``Evidence is accumulating'' that growth in demand will slow this year, Stevens said.

The Australian dollar fell to 94.38 U.S. cents at 4:35 p.m. in Sydney from 94.75 cents just before the decision was released. The two-year government bond yield fell 6 basis points to 6.52 percent. A basis point is 0.01 percentage point.

``Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation,'' Stevens said in a statement released on the central bank's Web site. ``On balance, the board's current assessment is that demand growth will remain moderate this year.''

If the economy doesn't slow as expected, or ``expectations about high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed,'' Stevens added.

The Reserve Bank has raised borrowing costs 12 times since May 2002, when the rate was 4.25 percent. By contrast, Federal Reserve Chairman Ben S. Bernanke lowered the benchmark U.S. interest rate by a quarter point to 2 percent last week, the seventh cut since September. The U.K. and Canada have also reduced rates this year to cushion their economies against fallout from the global credit squeeze.

Most economists surveyed by Bloomberg News before today's decision say Stevens will leave the benchmark rate unchanged for the rest of this year as slower household and business spending bring annual inflation back within his target range of between 2 percent and 3 percent. He increased the rate in March, February, November and August.

Surging gasoline, food and housing costs helped push core annual inflation to 4.4 percent in the first quarter, the highest rate in almost 17 years, a report showed on April 23.

Another index measuring inflation rose at a record pace in April as costs for gasoline, health services and rent surged. Consumer prices climbed 4.3 percent from a year earlier, according to a gauge published by TD Securities Ltd. yesterday.

Recent reports suggest the $1 trillion economy is losing momentum in its 17th straight year of expansion. March home- building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.

Gross domestic product slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent. The first-quarter GDP report will be released on June 4.

Investors expect the central bank will leave the benchmark lending rate unchanged in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps. At the start of last month, traders forecast more than half a percentage point of reductions.

Households, grappling with higher gasoline and food costs, are also facing extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.

Retail sales excluding food slid 0.3 percent in March from February, according to Helen Kevans, an economist at JPMorgan in Sydney.

Concern that the lowest unemployment rate in 33 years is driving up wages was a key reason the Reserve Bank raised borrowing costs in March.

Australia Keeps Key Rate Unchanged