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Australia's central bank raised inflation forecasts to the top of its target range yesterday and said economic growth would accelerate, a week after increasing the benchmark interest rate to an 11-year high.
Core inflation will quicken to 3 per cent by December and remain there next year, the bank said in a quarterly policy statement. It previously forecast underlying inflation would be 2.5 per cent this year.
Australia's dollar climbed the most of any currency yesterday as the comments reinforced expectations Governor Glenn Stevens would raise the overnight cash target rate again by early next year. The bank said it was keeping a "close watch" on inflation and turmoil in global financial markets.
"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. "Rates will go up in the early part of next year."
"Ongoing pressures are currently forecast to keep both underlying and CPI inflation near the top of the target range during 2008," the bank said.
"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 per cent in the year ending June 30, it said.
The Reserve Bank of Australia raised its benchmark interest rate to 6.5 per cent on August 8, the first adjustment since November.
England, Canada, New Zealand and South Korea all increased interest rates in the past month. Central banks globally are battling to curb inflation as surging world economic growth forces up food and commodity prices.
Sixteen of 27 economists surveyed on Friday said Australia's central bank would increase the rate a quarter point to 6.75 per cent by March 2008.
The yield on the 30-day interbank cash-rate future due in December climbed 5 basis points to 6.59 per cent, as traders raised bets the RBA will raise the cost of borrowing by then.
Headline consumer-price inflation will accelerate to 2.5 per cent by December 2007 and to 3 per cent by June 2008, the central bank forecast yesterday. That is higher than its previous predictions of 2.25 per cent and a range of 2.5 per cent to 3 per cent 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."
Australia's economy, in its 16th year of growth, has been strengthening as a surge in jobs and rising incomes fuel 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 per cent, close to the lowest in 33 years, and business and household confidence are near record levels. There is "little sign" capacity "pressures are leading to any generalised pickup in wages growth", the central bank said.
"Prices data, however, have indicated a pickup in inflation recently."
The key measure of wages probably increased 4.1 per cent in the second quarter from a year earlier, surveyed economists said.
The bank has previously said wage growth of 4.5 per cent or more may fuel inflation.
- Bloomberg
