June 6 (Bloomberg) -- The Reserve Bank of Australia may resume lifting the developed world’s highest borrowing costs in July or August to counter inflation fueled by the biggest surge in demand since 2009, rates in money markets show.
Yields on July and August interbank cash rate futures advanced, extending last week’s first gain in a month. A June 1 gross domestic product report showed demand grew 1.3 percent in the first quarter, more than twice as much as in the prior period. June contracts show traders are betting RBA Governor Glenn Stevens will leave the central bank’s target interest rate at 4.75 percent tomorrow, where it’s been since November.
Household spending accounts for 55 percent of Australia’s economy, and the central bank has sought to restrain consumption with 175 basis points of rate increases between October 2009 and November, letting investment in mining drive growth. A June 2 report showing the biggest increase in retail sales in 17 months signals higher incomes are encouraging consumers to spend more, spurring the first weekly decline for benchmark 10-year notes since April 8.
“The question over the timing of the next RBA move has come down to the propensity to consume,” said Jarrod Kerr, director of Australia rates strategy at Credit Suisse Group AG in Singapore. “The strength of consumption and the surge in income growth suggests the RBA will deliver another rate rise in the coming months.”
The RBA has expressed concern that higher consumption will clash with capacity constraints such as skill shortages caused by mining investment that the government estimates will reach A$76 billion ($82 billion) next fiscal year.
Twenty-three of 28 economists surveyed by Bloomberg News predict Stevens will keep rates unchanged tomorrow. Five forecast an increase to 5 percent.
Australia’s currency has soared 31 percent in the past year as surging commodity shipments to China and India underpin investors’ expectations that the RBA will raise rates.
The so-called Aussie reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983, and traded at $1.0749 at 4:52 p.m. in Sydney.
Unemployment has fallen to a two-year low and consumer price growth accelerated last quarter to the fastest pace since 2006 as companies including BHP Billiton Ltd., the world’s biggest mining company, expand output.
Iron Ore, Coal
“Australia’s terms of trade are likely to rise further in the June quarter, to be above the level assumed a few months ago -- and at their highest level in at least 140 years -- boosted in particular by high prices for iron ore and coal,” the RBA said in its quarterly policy statement on May 6, referring to a measure of income earned from exports.
The yield on July cash-rate futures rose to 4.83 percent today in Sydney, while the rate on the August contract climbed to 4.88 percent. The chances of a July rate increase reached 32 percent from 20 percent on May 27, while the probability of an advance in August rose to 52 percent from 36 percent.
The current stretch is the fourth time since mid-2007 that Australia’s central bank has held policy for five-straight meetings. The RBA raised rates in November 2010 and October 2009, after ending such a pause in October 2008 with a reduction in the benchmark.
Australia’s economy shrank 1.2 percent in the first quarter, the most since 1991, as floods in the northeast slashed coal exports, a June 1 report showed. Even so, the currency rose and bonds fell the most in almost four months after the data as investors focused on final demand, the broadest measure of spending by government, consumers and businesses, which more than doubled from 0.6 percent in the final quarter of 2010.
A day later, a government report showed April retail sales advanced 1.1 percent from a month earlier, the biggest jump since November 2009 and almost three times more than the median forecast in a Bloomberg News survey of economists.
In the May 6 review, the RBA forecast growth of 4.25 percent this year. Consumer prices will rise 3.25 percent over the period and core inflation will reach 3 percent, it said.
Expectations for consumer-price gains declined last week for a fourth week, the longest stretch since December, government debt markets show. The gap between yields on five- year inflation-linked notes and similar-maturity bonds that aren’t indexed shrank to 2.97 percentage points today from 2.98 percentage points on June 3 and 3.01 percentage points on May 27, according to data compiled by Bloomberg.
The so-called breakeven rate shows investor estimates for annual inflation over the lifetime of the bonds. The RBA aims to keep inflation in a range of 2 percent to 3 percent on average.
The central bank may also have cause to keep rates unchanged as global growth shows signs of weakening, including the economies of some of Australia’s biggest trading partners, and Europe’s debt crisis deepens.
China’s manufacturing expanded at the slowest pace in nine months in May, a survey of companies released last week showed. India’s growth in three months to March 31 was the weakest in five quarters, and Japan’s industrial production rose less than economists forecast in April. Those three countries accounted for 51 percent of Australia’s total exports so far this year.
Greece’s fiscal crisis worsened enough for Moody’s Investors Service last week to raise the probability of a default to 50 percent. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said June 3 that the European Union will approve a new aid plan for Greece.
U.S. stocks fell last week, sending the Dow Jones Industrial Average to its longest stretch of losses since 2004, after Labor Department figures showed payrolls rosed 54,000 in May, less than the 165,000 median forecast in a Bloomberg News survey, while the jobless rate climbed to 9.1 percent.
“Australian fixed income looks to have been the beneficiary of heightened European concerns and increased uncertainty over the U.S. outlook,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney.
The yield on the Australian government’s benchmark 10-year note advanced to 5.234 percent on June 3 from 5.230 percent on May 27, snapping the longest stretch of declines since 2008. The rate declined 2 basis points to 5.21 percent today. The premium over similar-maturity Treasuries widened to 222 basis points, or 2.22 percentage point, from this year’s low of 197 on March 3.
A May 31 central bank report showed loans provided by Australian banks and finance companies stagnated in April. Australian employers shed 22,100 workers in April, bringing to 26,300 the number of net new jobs created in first four months of 2011, the weakest for that period since 1999.
Australia’s minimum wage was increased 3.4 percent to A$589.30 a week, the national workplace relations tribunal said June 3. The wage price index rose 3.8 percent in the first quarter from a year earlier, the government reported May 18.
Stevens has held rates for five meetings to allow the economy in Queensland to recover from floods in January that Prime Minister Julia Gillard called the nation’s most expensive natural disaster.
Further weighing on consumers, the government said last month it will end 23 years of spending growth to help ease inflation pressure and support the return to a budget surplus.
The gap between yields on corporate notes and sovereign debt widened one basis point last week to 162, paring this year’s decline in the spread to 35 basis points, Bank of America Merrill Lynch indexes show.
In a statement after its May 3 policy decision, the RBA said it left rates unchanged as households continue to show caution in spending and borrowing, and are saving more.
Last week’s GDP report showed Australia’s household savings ratio climbed to 11.5 percent in the three months through March from 9.7 percent in the previous quarter, the highest level since 2009.
--With assistance from Candice Zachariahs and Daniel Petrie in Sydney. Editors: Brendan Murray, Garfield Reynolds
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