Finance news

Australia's central bank raised its benchmark interest rate by a quarter point to an 11-year high, saying a “significant slowing in demand'' is needed to cool the fastest inflation since 1991.

Governor Glenn Stevens and his board increased the overnight cash rate target to 7 percent in Sydney today, as forecast by all 27 economists surveyed by Bloomberg News. Stevens said annual inflation, which has overshot the bank's target, may accelerate further before moderating in 2009.

Australia becomes the first developed nation to raise borrowing costs after Federal Reserve Chairman Ben S. Bernanke cut the U.S. rate last week in the fastest easing of monetary policy since 1990. Central banks across Asia and Europe face challenges balancing the threat of a global economic slowdown against signs of quickening inflation as commodity prices soar.

“The economy is still seeing plenty of momentum to justify the Reserve Bank of Australia's caution,'' said Hans Kunnen, who helps manage the equivalent of $128 billion at Colonial First State Asset Management in Sydney. “They can still cut rates if need be down the track.''

The Australian dollar traded at 90.66 U.S. cents at 4:30 p.m. in Sydney from 90.65 cents before the decision. The yield on the two-year bond fell 4 basis points to 6.72 percent.

Slowdown Needed

“A significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time,'' Stevens said in a statement. At the same time, “the world economy is slowing and it now appears likely that global growth will be below trend in 2008.''

This marks the bank's 11th increase since May 2002, which has lifted the rate from 4.25 percent.

The gap between the Australian and U.S. benchmark rates widened to 4 percentage points today, the largest in more than three years. That may drive demand for Australia's currency, which has climbed 17 percent against the U.S. dollar in the past year as investors flocked to the nation's higher-yielding assets.

Core inflation has breached the Reserve Bank's 2-to-3 percent target for two consecutive quarters, forcing Stevens to make his third rate increase in six months even after global equity markets plunged. Underlying inflation accelerated to 3.8 percent in the fourth quarter from a year earlier, a Jan. 23 report showed.

“The real sting in the tail is the bank's statement that domestic spending has to fall substantially'' to ease inflation, said Brian Redican, an economist at Macquarie Research in Sydney. “It could still take further aggressive tightening to get that demand down.''

Interest-Rate Forecasts

Macquarie expects another rate increase in the second quarter of 2008 easy payday loan. Nineteen of 27 economists surveyed last week forecast the central bank won't move again this year.

Price pressures have intensified in the A$1 trillion ($910 billion) economy as Chinese demand for mineral resources prompts Rio Tinto Group and other miners to hire workers. Jobs growth has worsened a skills shortage that is boosting wages. Fuel, food and housing costs are also rising.

“As a government, we believe the fight against inflation must come first,'' Prime Minister Kevin Rudd said in Canberra today. “Inflation pressures have been building a long time.''

Rudd said last month he would cut government spending to help damp inflation. He led the Labor Party to a victory in November's election, ending 11 years in opposition.

The economy grew 4.3 percent in the third quarter from a year earlier, the fastest pace in more than three years. Fourth- quarter figures are due on March 5.

Construction, Spending

Reports released today signal that higher borrowing costs may be starting to damp the economy's 16-year expansion.

Home-building approvals slumped 16 percent in December from the previous month, the statistics bureau said. Retail-sales growth cooled to 0.5 percent in December from 0.8 percent in November.

Consumer confidence fell in January by the most in 14 months, according to a survey published by Westpac Banking Corp. last month. Business sentiment dropped to the lowest in two years in December, National Australia Bank reported.

“There is a danger here that the Reserve Bank will end up going just too far, and might have to reverse the increase later this year or early next year,'' said Shane Oliver, chief economist at AMP Capital Investors in Sydney.

The All Ordinaries Index of stocks suffered its worst monthly decline in more than 20 years in January.

The European Central Bank may keep its rate at a six-year high of 4 percent this week as it deems quickening inflation a greater concern than slowing growth, a survey of economists showed. Indonesia may leave rates unchanged tomorrow after consumer prices rose the most in 16 months, economists said.

By contrast, the Bank of England may lower its rate to 5.25 percent on Feb. 7, a separate survey showed. The Fed slashed its rate by 125 basis points in January.

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