March 4 (Bloomberg) -- Australia's central bank increased its benchmark interest rate by a quarter percentage point for the second time in four weeks to the highest in almost 12 years to curb the fastest inflation since 1991.
Governor Glenn Stevens and his board raised the overnight cash rate target to 7.25 percent in Sydney today, as forecast by all 27 economists surveyed by Bloomberg News. The bank also boosted rates in February, November and August.
Stevens triggered the first back-to-back monthly increase in more than four years, even as counterparts in the U.S., Canada and the U.K. signal cuts to cushion their economies from slower global growth and credit market turmoil. Australia's 16-year expansion, stoked by booming exports of natural resources, has pushed the jobless rate to the lowest since 1974 and worsened a labor shortage that is driving up wages and inflation.
``Having weighed both the international and domestic information available, the board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2 percent to 3 percent over time,'' the central bank said today in a statement.
The Australian dollar fell to 93.44 U.S. cents at 2:34 p.m. in Sydney from 93.77 cents immediately before the report after Stevens said in the statement that increases in borrowing costs since the middle of 2007 are ``substantial.'' The yield on the benchmark two- year government bond dropped 10 basis points to 6.56 percent. A basis point is 0.01 percentage point.
Today's is the 12th increase since May 2002, when the rate was 4.25 percent, and widens the gap between the Australian and U.S. benchmarks to 4.25 percentage points.
Largest Gap
That's the largest gap in almost four years and will fuel demand for Australia's currency, which surged to a record 94.98 U.S. cents last week. Federal Reserve Chairman Ben S. Bernanke cut the U.S. interest rate in January by 125 basis points in the fastest easing of monetary policy since 1990.
Concern that Australia's economic expansion is driving up wages was a key reason central bank policy makers considered raising the benchmark rate by 50 basis points for the first time in eight years at their February meeting, according to minutes published last month.
The bank signaled today that its rate increases are starting to bite. ``There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat. The extent of that moderation is uncertain, however.''
Australia's economic growth probably slowed to 0.8 percent in the fourth quarter from the previous three months, when it expanded 1 percent, according to the median estimate of 24 economists surveyed by Bloomberg News. The gross domestic product report will be released at 11:30 a.m. in Sydney tomorrow. The economy probably expanded 3.8 percent from a year earlier.
Gains in underlying inflation have exceeded the central bank's target for two quarters.
Accelerating Inflation
Core inflation, which excludes the most volatile items in the consumer price index, accelerated to 3.8 percent in the fourth quarter.
The central bank forecast last month that inflation will remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies such as miner Rio Tinto Group to expand and hire more workers. The jobless rate fell to 4.1 percent in January. The bank said today inflation ``is likely to remain relatively high in the short term, and will probably rise further in year-ended terms before moderating next year.''
Rising fuel, food and housing costs and bottlenecks at ports and railways are adding to inflation pressures, economists say.
Australia's current account deficit widened to a record A$19.35 billion ($18.1 billion) in the fourth quarter as transport bottlenecks limited overseas shipments of commodities, a report published today showed.
Company profits rose in the fourth quarter, rebounding from the first decline in more than two years, as earnings at miners, builders and manufacturers climbed, a report showed yesterday. Earnings advanced 3.9 percent from the third quarter.
Economic Growth
Recent reports suggest higher borrowing costs, as well concern that Australia's largest trading partners will be buffeted by slowing U.S. economic growth, may curb spending by consumers and business.
Retail sales stagnated in January after December's 0.4 percent increase, a separate report showed today.
An index of Australia's leading growth indicators fell in December for the first time in almost three years, business confidence slumped in January to the lowest since the September 2001 terrorist attacks in the U.S., and consumer sentiment fell in February to a 15-month low.
Homeowners are also paying more in mortgage repayments after Commonwealth Bank of Australia added 30 basis points to its home- loan rate after last month's central-bank move. The nation's largest banks raised interest rates by an average 15 basis points in January to recoup higher funding costs caused by the global credit squeeze. Those increases were independent of any action by the central bank.
Today's central bank increase will add about A$42 a month to the average A$250,000 home loan, according to the Housing Industry Association.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net Last Updated: March 3, 2008 22:46 EST