Finance & Business World

Australia’s central bank may leave interest rates unchanged today for a sixth month and signal plans to increase borrowing costs as early as next month amid signs the economy is strengthening.

Reserve Bank Governor Glenn Stevens will keep the overnight cash rate target at 3 percent at 2:30 p.m. in Sydney, according to 19 of 20 economists surveyed by Bloomberg News. One expects a quarter percentage point increase.

The benchmark rate will have to be raised from its current “unusually low level at some point” as private demand increases, Stevens said last week. The local currency’s surge to a 13-month high and forecasts by analysts for an increase in unemployment may prompt Stevens to delay an increase this month.

“Board members are still uncertain about the sustainability of the global recovery,” said Stephen Roberts, an economist at Nomura Australia Ltd. in Sydney. Low inflation also “provides the Reserve Bank with the luxury to normalize interest rates slowly, even as the economy exhibits modest growth.”

Speculation that Stevens will move faster than policy makers in the U.S., Europe and Japan to raise borrowing costs has helped stoke a 25 percent gain in the nation’s currency this year, curbing earnings by exporters including BHP Billiton Ltd.

Investors have a 100 percent expectation Stevens will raise the overnight cash rate target by a quarter percentage point in November, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. They also tipped a 40 percent chance of an increase today, the index showed at 10:36 a.m.

‘Good Episode’

Governor Stevens, who cut the benchmark lending rate by a record 4.25 percentage points between September 2008 and April to cushion the economy against fallout from the global credit squeeze, said on Sept. 28 that compared with past recessions, “this has been a good episode for Australia.”

“In due course, both fiscal and monetary support will need to be unwound as private demand increases,” Stevens told a Senate committee in Sydney.

Reports published last week showed retail sales, approvals to build private homes, bank mortgage lending and property prices all jumped in August, adding to signs the economy will strengthen this quarter.

Advertisements for job vacancies rose in September for a second straight month, gaining 4.4 percent from August, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne yesterday.

Unemployment Rising

Still, a report due Oct. 8 will show the unemployment rate rose to 6 percent last month from 5.8 percent as employers cut 10,000 jobs, according to the median estimate of 20 economists surveyed by Bloomberg.

Consumer spending, stoked by A$20 billion ($17.6 billion) in government cash handouts to households, helped fuel a 1 percent expansion in Australia’s gross domestic product in the first half of this year.

The government is also boosting domestic demand by spending an extra A$22 billion on roads, railways, ports and schools.

There are increasing signs the stimulus is starting to drive up asset prices. The nation’s benchmark S&P/ASX 200 index of stocks has surged more than 20 percent this year, and a report published Sept. 30 by property monitoring company RP Data-Rismark showed house prices climbed 7.9 percent in the first eight months of this year.

Economic Growth

“We are in a situation where we would not want to see very strong growth in housing prices — that would be unhelpful from a social perspective,” Anthony Richards, the head of the central bank’s economics department, said on Sept. 29, adding that it’s “not reasonable to expect that interest rates will stay at the current low levels indefinitely.”

The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will rise 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

While an increase in the benchmark rate today is possible, a “hike in November is a better bet,” said Spiros Papadopoulos, a senior economist at National Australia Bank Ltd. in Melbourne.

“By then, we will have the September-quarter consumer price index, and another full round of key monthly indicators to shore up the central bank board’s view that the economy is on a sustained recovery path,” he said.

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