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Australian Central Bank Raises Inflation Forecasts

Aug. 13 (Bloomberg) -- Australia's central bank raised inflation forecasts to the top of its target range and said economic growth will accelerate, a week after increasing the benchmark interest rate to an 11-year high.

Core inflation will quicken to 3 percent by December and remain there next year, the bank said in a quarterly policy statement released in Sydney today. It previously forecast underlying inflation, which excludes the most volatile price movements, would be 2.5 percent this year.

Australia's dollar climbed the most of any major currency today as the comments added to expectations Governor Glenn Stevens will increase interest rates again by early next year. Central banks globally are battling to curb rising prices as surging world economic growth forces up food and commodity costs. China's inflation accelerated to the highest in more than 10 years.

``This is tough talking on the inflation front,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's second-largest lender by assets. ``Interest rates will go up in the early part of next year.''

The Australian dollar advanced to 84.79 U.S. cents at 4:30 p.m. in Sydney from 84.68 cents before the statement and 84.43 in late New York trading last week. The yield on the 10-year government bond rose 9 basis points, or 0.09 percentage point, to 6.01 percent.

The central bank said it's keeping a ``close watch'' on inflation and turmoil in global financial markets.

Faster Growth

``Ongoing pressures are currently forecast to keep both underlying and CPI inflation near the top of the target range during 2008,'' it said today. ``With the economy currently growing at a higher-than-average pace, capacity pressures are likely to persist in the near term.''

Economic growth will accelerate to 4.25 percent in the year ending June 30, the bank forecast. Underlying inflation excludes the most volatile price movements.

The Reserve Bank of Australia raised its benchmark overnight cash rate target to 6.5 percent on Aug. 8, the first adjustment since November. England, Canada, New Zealand and South Korea all increased interest rates in the past month.

China's consumer prices soared 5.6 percent in July from a year ago, a report showed today, fueling speculation the government may raise interest rates for a fourth time in 2007.

Sixteen of 27 economists surveyed by Bloomberg News Aug. 10 say Australia's central bank will increase its benchmark rate a quarter point to 6.75 percent by March 2008.

The yield on the 30-day interbank cash-rate future due in December climbed 5 basis points to 6.59 percent today as traders raised bets the Reserve Bank will raise the cost of borrowing by then.

Consumer Prices

Headline consumer-price inflation will accelerate to 2.5 percent by December 2007 and to 3 percent by June 2008, the central bank forecast today. That is higher than its previous predictions of 2.25 percent and a range of 2.5 percent to 3 percent respectively.

``The revision to the inflation forecast suggests they want to increase interest rates again,'' said Shane Oliver, chief economist at AMP Capital Investors in Sydney. ``It's a significant revision.''

The economy, in its 16th year of growth, is strengthening as a surge in jobs and rising incomes fuel consumer spending, and China's demand for commodities drives expansion by exporters such as BHP Billion Ltd., the world's largest miner.

The jobless rate is 4.3 percent, close to the lowest in 33 years, and business and household confidence are near record highs.

There is ``little sign'' capacity ``pressures are leading to any generalized pickup in wages growth,'' the central bank said. ``Prices data, however, have indicated a pickup in inflation recently.''

Wages Report

The key measure of wages probably increased 4.1 percent in the second quarter from a year earlier, according to a Bloomberg News survey of economists. The report will be released Aug. 15. The bank has previously said wage growth of 4.5 percent or more may fuel inflation.

The central bank aims to keep annual consumer price changes between 2 percent and 3 percent. Consumer prices climbed 2.1 percent in the quarter from a year earlier, more than Stevens' forecast in May of 1.75 percent. Higher food, transport and housing costs drove inflation.

Policy makers have given ``careful consideration to recent developments in global financial markets,'' the central bank said. ``At this stage, however, the evidence continues to point to strong growth in the global economy overall.''

Global Rout

Credit and stock markets have slumped in recent weeks amid growing concern losses in the U.S. subprime mortgage market will spread throughout the world. Australia's stock index plunged on Aug. 10 by the most since September 2001. The index rose 1.3 percent today.

The Reserve Bank last week joined central banks in the U.S., Europe and Japan in pumping funds into the financial system to prevent overnight interest rates from surging and ensuring lenders have access to funding.

Global economic growth has ``remained strong,'' Australia's central bank said. ``It will remain important to keep a close watch on both domestic inflation risks and any further developments in international financial markets.''

To contact the reporter for this story: Victoria Batchelor in Sydney at