Business

Fri May 30 01:47:37 PDT 2008

SYDNEY, May 30 (Reuters) – Australia’s central bank is considered almost certain to keep interest rates steady at 12-year highs next week, with a raft of key data likely to confirm that past hikes are working to slow the economy. The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and a Reuters poll of 21 analysts found all expected the cash rate to stay at 7.25 percent.

"My summary of the current state of play is straightforward," said Rory Robertson, an interest rate strategist at Macquarie.

"Policy has been tightened aggressively. And policy is biting, via higher interest rates, tighter credit standards and the elevated dollar," he explained. "Domestic demand is in the process of slowing significantly. So, policy will remain on-hold for the foreseeable future." The central bank has raised rates four times since August in an effort to slow a booming economy and restrain core inflation, which accelerated to a 17-year high in the first quarter.

It seriously considered hiking again at its May meeting but decided there were enough signs of a cooling in consumption to wait and see how things developed.

That patience should be justified by data on gross domestic product (GDP) on Wednesday. Analysts estimate Australia’s A$1 trillion ($953 billion) economy grew just 0.3 percent in the first quarter, the smallest increase since late 2004.

Growth for the year is seen slowing to 2.9 percent, a sharp turnaround from 3.9 percent in the fourth quarter of 2007, largely due to a slump in household spending. Full forecasts can be found on [AU/ECI].

So severe has been the retrenchment by consumers and business that the economy may even have shrunk in the quarter, though only two analysts were bold enough to call a contraction.

It would be the first negative GDP result since the fourth quarter of 2000, and that was mainly an aberration caused by the imposition of a national sales tax. Otherwise, you have to go back to 1993 to find a fall in national output.

Whatever the outcome, most analysts believe the economy will slow enough for the RBA to avoid another tightening this cycle, though it could be a close run affair.

The median chance of a further hike was put at 43 percent with much depending on whether a huge increase in Australia’s terms of trade this year feeds spurs a revival in consumption later in the year.

Also on next week’s packed schedule are readings on retail sales, business activity, building approvals and trade. The sales numbers are the key indicator of consumer demand and forecasts are for a modest 0.2 percent increase in April, following a very subdued first quarter.

The risk might be for a lower outcome given consumer confidence hit a 15-year low that month and data on private sector credit out on Friday showed the smallest rise since 2001.

Borrowing for personal use, such as on credit cards, was flat while annual growth slowed to 9.8 percent, a long way from last year’s peak of 16.2 percent.

"The weakness in borrowing for consumption purposes has been particularly notable since the start of the year, consistent with a paring back in expenditure," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"The waning appetite for credit provides further confirmation that monetary policy has gained considerable traction. We expect the RBA to stay on the sidelines for the foreseeable future." ————————————————————— Ahead of the RBA’s policy meeting on June 3, analysts were asked the percentage chance of a rise in the 7.25 percent cash rate at this meeting? The percentage chance of a further rate rise at all this tightening cycle? And what would be the peak for rates? —————————————————————

% chance % chance Peak for

June hike hike at all cash rate ABN AMRO 30 30 7.25 AMP 30 30 7.25 ANZ 30 75 7.75 Action 35 85 7.50 Barclays 20 30 7.25 CBA 15 55 7.5 Deutsche 30 60 7.50 4Cast 5 40 7.25 GSJBW 20 40 7.25 ICAP 20 66 7.50 JP Morgan 25 45 n/a Lehman 5 30 7.25 Macquarie 2 60 7.50 Merrill 25 45 7.25 NAB 5 30 7.25 Nomura 10 45 7.25 RBC 20 40 7.25 St George 5 40 7.25 TDSec 5 20 7.25 UBS 5 45 7.25 Westpac 25 40 7.25 ————————————————————— Low 2 20 7.25 High 35 85 7.75 Average 18 45 7.25 Median 20 43 7.25 —————————————————————

(Reporting by Wayne Cole; Editing by James Thornhill)

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