oz interest rate increase likely -

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    Australian Central Bank Rate Increase More Likely

    Feb. 7 (Bloomberg) -- Australia's central bank said the likelihood of an interest-rate increase ``in the months ahead'' has grown after the inflation rate doubled in the fourth quarter. The Australian dollar and bond yields rose.

    The Reserve Bank of Australia said in its quarterly policy statement that inflation may reach 3 percent by the end of 2006, the top of its target range for annual price increases. There is a risk the inflation forecast may be ``too low,'' the bank said in the statement, released in Sydney today.

    Governor Ian Macfarlane last week left the overnight cash rate target unchanged at 5.25 percent for a 14th month to support an economy that grew at its slowest pace in four years in the third quarter. The bank may raise borrowing costs as soon as next month should a government report on Feb. 23 show the jobless rate at a 28- year low is boosting wages, economist Michael Blythe said.

    ``It's all systems go for a rate rise,'' said Blythe, chief economist at Commonwealth Bank of Australia in Sydney. ``Depending on how strong the wage numbers are, we may see a rise in March.''

    The inflation rate in the fourth quarter doubled to 0.8 percent, as travel and food costs surged, and increased 2.6 percent from a year earlier. Wages rose 0.9 percent in the third quarter for an annual increase of 3.5 percent.

    The Australian dollar jumped to 77.25 U.S. cents at 4.31 p.m. in Sydney from 76.75 cents before the report was released. The yield on the 6.25 percent bond maturing April 2015 rose 10 basis points to 5.38 percent. A basis point is 0.01 percentage point.

    Rate Increase

    The implied yield on the June 90-day bank bill futures surged 14 basis points to 5.74 percent after the statement, showing more investors expect a rate increase by June.

    ``The board decided at its February meeting to leave rates unchanged while noting that the likelihood of further monetary tightening being required in the months ahead had increased,'' the central bank said today.

    The A$794 billion ($613 billion) economy grew 0.3 percent in the third quarter as exports and home building fell. The growth report was ``surprisingly weak,'' the central bank said, adding other evidence points to a stronger economy.

    Consumer confidence rose to an 11-year high in January, according to a report by Westpac Banking Corp. The unemployment rate fell to 5.1 percent in December, the lowest in 28 years. The number of home-loan approvals to owner-occupiers rose 2.7 percent in November, the largest increase in almost two years.


    Macfarlane and the bank's board next meet in March and all but one of 22 economists surveyed by Bloomberg News prior to today's statement forecast borrowing costs will be left unchanged.

    ``The bank has its finger on the trigger to increase rates,'' Bob Cunneen, senior economist at AMP Capital Investors, Australia's No. 2 money manager, said in Sydney. ``A 25 basis point increase in rates is likely before the end of the June quarter.''

    The board ``will respond as necessary to ensure that rising inflation does not jeopardize the sustainable expansion of the Australian economy,'' the central bank said.

    Higher costs domestically now pose the bigger threat to inflation, instead of rising world oil prices, the central bank said.

    ``The board's judgment is still that this pickup in inflation will be quite gradual,'' it said, forecasting the inflation rate will be 2.5 percent by the end of this year. ``However, the possibility that wage and price pressures will build more quickly cannot be ruled out.

    Housing Market

    ``Continued pressure on raw materials prices, evidence of capacity constraints in some sectors and reports of higher employment costs, constitute a risk that this forecast could prove too low.''

    There also have been recent signs housing may be picking up, with home prices ``a little firmer'' in the fourth quarter and demand for finance increasing, the central bank said.

    ``It is too early, however, to tell whether these latest developments represent a significant change in trend,'' it said.

    ``The growth of credit to both the household and business sectors remains high.''

    Credit growth increased at an annual rate of 12 percent in the six months ended Dec. 31.

    To contact the reporter for this story:
    Victoria Batchelor in Sydney at [email protected]

    To contact the editor responsible for this story:
    Christopher Wellisz at [email protected]
    Last Updated: February 7, 2005 00:35 EST

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