< Back to News

Australia Increases Benchmark Interest Rate to 3.75%

Dec. 1 (Bloomberg) — Australia’s central bank raised its benchmark interest rate by a quarter percentage point for an unprecedented third straight month as evidence mounts that the nation’s economy is strengthening.

Reserve Bank Governor Glenn Stevens increased the overnight cash rate target to 3.75 percent from 3.5 percent in Sydney, as forecast by 19 of 20 economists surveyed by Bloomberg News. The board won’t meet again until February.

The nation’s currency fell after Stevens signaled he may now pause, saying the board’s “material adjustments” to borrowing costs are enough to keep inflation within his 2 percent to 3 percent target range. Rising consumer confidence, higher house prices and China’s demand for resources such as iron ore from BHP Billiton Ltd. are driving a “new upswing” in the economy that will last several years, the bank says.

Stevens’s “statement reads as if he feels they’ve done a fair bit of work and can now afford to take time out,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. “I’d be looking for another rate increase no earlier than March or April.”

The Australian dollar fell to 91.33 U.S. cents at 3:45 p.m. in Sydney from 91.71 cents just before the decision was announced. The two-year government bond yield dropped 7 basis points to 4.24 percent. A basis point is 0.01 percentage point.

First Time

Today’s increase is the first time the central bank has raised borrowing costs at three straight meetings, boosting the rate from a half-century low of 3 percent. By contrast, officials in the U.S., U.K. and Europe have kept their benchmark lending rates at historic lows this year.

Japan’s central bank announced an emergency meeting today, spurring speculation it may seek to limit gains by the yen against the dollar. The yen climbed 4.3 percent last month and the Nikkei 225 Stock Average dropped 6.9 percent on concern a strengthening local currency will erode export earnings.

Speculation that Stevens would continue to lead the world in raising rates has stoked this year’s 30 percent surge in the nation’s currency, making it the best performer among the 16 major currencies against the U.S. dollar.

“In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,” Stevens said today.

House Prices

Australia’s economy expanded 1 percent in the first half of the year and is forecast by the Reserve Bank to grow 3.25 percent next year and in 2011. Third-quarter gross domestic product figures will be published on Dec. 16.

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 ($96 billion) in the year ending June 30, 2010, which is 5.9 percent more than they estimated three months earlier.

“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.

A report published earlier today 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.

Rio Tinto Group 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.

Jobs Boom

The nation’s single biggest investment project, the A$43 billion Gorgon natural-gas venture involving Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc, will create as many as 10,000 jobs when construction starts early next year, Chevron said on Sept. 14.

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

Today’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 today.

Mortgage Repayments

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 Prime Minister Kevin Rudd’s 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 today’s central bank decision.

Consumers could “shut down” if borrowing costs are raised too quickly, said Ivan Hammerschlag, chairman of RCG Corp., which operates sporting shoe retailer The Athletes Foot, according to today’s Australian Financial Review. “Mortgage rates are still low, but I think the consumer forgets that.”

Today’s central bank statement “is quite bullish in that they say the whole world is on a growth path,” said Annette Beacher, an economist at TD Securities Ltd. in Singapore. “But in no way are they signaling an aggressive tightening cycle is on the agenda.”

Supporting the argument for a pause in rate increases, inflation cooled to the slowest pace in 10 years, gaining in the third quarter by an annual 1.3 percent, after advancing 1.5 percent in the previous three months.

Building approvals unexpectedly dropped in October for the first time in five months, and manufacturing grew in November at a slower pace as companies reported fewer new orders and a faster decline in inventories, reports today showed.

“Today’s interest rate rise is surprising,” Australian Industry Group Chief Executive Heather Ridout said. Policy makers “could have afforded to take a pause until the New Year when the business outlook is clearer.”