By
Hans van Leeuwen
April 3 (Bloomberg) -- Australia's central bank meets today, with economists and traders predicting it will raise the benchmark interest rate either this week or next month to stem inflation.
There is a 50 percent chance the Reserve Bank of Australia will raise the overnight cash rate target by a quarter point to a 10-year high of 6.5 percent when it makes its announcement at 9:30 a.m. tomorrow in Sydney, according to the median estimate in a Bloomberg News survey of 25 economists. Twelve economists predict the bank will move this week. Three say it will wait until next month after it has seen an inflation report due on April 24.
Traders price a 67 percent chance of an April interest-rate increase into futures contracts, according to Credit Suisse, after recent reports of buoyant consumer spending and jobs growth raised the prospect of faster inflation. The bank last month said inflation may be ``too high'' this year, even as U.S. economic growth slows and global interest rates climb.
``Many of us are wobbling on either side of even money,'' said Rory Robertson, an interest-rate strategist at Macquarie Bank Ltd. in Sydney. ``The bank prodded us two weeks ago to think harder about an April interest-rate hike.''
The outlook for underlying inflation ``is still higher than ideal,'' Reserve Bank Assistant Governor Malcolm Edey said on March 16. ``It implies that inflation is more likely to be too high than too low in the period we can foresee.''
Following Edey's comments, some economists began predicting an April interest-rate increase and traders raised the probability of a move from zero percent to more than 50 percent, according to Credit Suisse's index of interest-rate futures.
Retail Sales
The index rose further, and more economists revised their view, after the government yesterday released reports showing retail sales rose twice as much as expected in February and home-building approvals had their biggest monthly gain in more than three years.
Rising household spending had already driven the fastest economic growth in more than a year in the fourth quarter, according to a government report in March that was also twice economists' expectations.
That came even after the Reserve Bank raised interest rates three times last year as it battled to get inflation back into its target range of between 2 percent and 3 percent.
The annual inflation rate has topped the target since the second quarter of last year, and was 3.3 percent in the three months to Dec. 31.
Still, the fourth-quarter rate was slower than the previous three months as fruit and fuel prices fell. The Reserve Bank forecasts the so-called underlying inflation rate, which strips out volatile price movements, will cool to 2.75 percent this year from 2.9 percent at the end of 2006.
`Why Rush?'
``The arguments for an interest-rate increase are reasonably compelling, the data has been firm, but why rush?'' said Stephen Walters, chief economist at JPMorgan Chase & Co., whose forecasts for the rate and probability both match the survey median.
``At the moment, we're still looking at the same inflation numbers we had when the bank met last month, which showed the annual rate was slowing.''
A slowing U.S. economy and rising interest rates in Europe and Japan may also put a brake on Australian economic growth and inflation.
The U.S. economy grew at a revised annual pace of 2.5 percent in the fourth quarter as home-building cooled.
The European Central Bank has raised interest rates seven times since December 2005 to 3.75 percent, and both China and Japan have raised their benchmark interest rates in the past year.
Following are economists' forecasts for the overnight cash rate target after the Reserve Bank's April meeting, and the probability of a move. The table also shows the economists' forecasts for the benchmark rate at the end of the second and fourth quarters of 2007:
Rate by End of: April Probability 2nd-Qtr 4th-Qtr
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Median 6.25% 50% 6.50% 6.50%
High Forecast 6.50% 90% 6.50% 6.75%
Low Forecast 6.25% 31% 6.25% 6.00%
No. of replies 25 25 25 25
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4Cast 6.50% 75% 6.50% 6.50%
ABN Amro 6.25% 40% 6.25% 6.25%
AMP Capital 6.25% 50% 6.25% 6.00%
ANZ Bank 6.50% 60% 6.50% 6.75%
Ausbil Dexia 6.25% 40% 6.50% 6.50%
Barclays Capital 6.25% 40% 6.25% 6.25%
BT Financial 6.25% 31% 6.50% 6.50%
Citigroup Australia 6.50% 60% 6.50% 6.50%
Commonwealth Bank 6.25% 40% 6.25% 6.25%
Deutsche Bank 6.50% 60% 6.50% 6.50%
Goldman Sachs 6.25% 45% 6.25% 6.00%
Grange Securities 6.50% 65% 6.50% 6.50%
ICAP Australia 6.25% 45% 6.25% 6.25%
IDEAglobal 6.25% 40% 6.50% 6.50%
JPMorgan Chase 6.25% 50% 6.25% 6.25%
Macquarie Bank 6.25% 45% 6.25% 6.25%
Merrill Lynch 6.50% 65% 6.50% 6.50%
National Australia 6.25% 50% 6.25% 6.25%
RBC Capital Markets 6.50% 60% 6.50% 6.50%
Societe Generale 6.50% 90% 6.50% 6.75%
St.George Bank 6.25% 45% 6.25% 6.25%
Suncorp 6.50% 60% 6.50% 6.50%
TD Securities 6.50% 70% 6.50% 6.75%
UBS Australia 6.50% 65% 6.50% 6.50%
Westpac Bank 6.50% 70% 6.50% 6.50%
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To contact the reporter on this story: Hans van Leeuwen in Sydney at hvanleeuwen1@bloomberg.net .
Source : http://www.bloomberg.com/apps/news?pid=20601081&sid=ay9hxeLmdEPo&refer=australia
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