Australian inflation hits limits so interest rates set to rise

SYDNEY - Australia's central bank probably will raise its benchmark interest rate a quarter percentage point today, the first increase in 15 months, to curb inflation as rising employment stokes wage increases.

Reserve Bank Governor Ian Macfarlane is expected to increase the overnight cash rate target to 5.5 per cent, the highest since March 2001.

This month, Macfarlane said borrowing costs would increase "at some point" as inflation accelerates faster than he previously expected. Core inflation might be 3 per cent by the end of 2006, which is at the top of the bank's target range for annual price rises, said Macfarlane, warning that even this forecast might be too low.

"The central bank is likely to act ... because the risks for higher inflation are increasing," Stephen Halmarick, co-head of economic and market analysis at Citigroup Global Markets, said in Sydney. "The Reserve Bank will also likely signal that a further rate increase will be required."

The bank is concerned the unemployment rate, at a 28-year-low 5.1 per cent in January, may force up wages and stoke inflation. The wage price index, which measures hourly rates of pay, rose 1 per cent in the fourth quarter from 0.9 per cent in the previous three months.

Annual inflation also accelerated in the fourth quarter. The consumer price index, the key gauge of inflation, rose 2.6 per cent from a year earlier. The annual inflation rate rose 2.3 per cent in the third quarter.

Business investment surged 5.7 per cent in the fourth quarter and companies said they planned to spend A$54.9 billion ($60 billion) on new investment in the year ending June 30, which is 1.7 per cent more than they estimated three months ago.

Still, reports yesterday showing company profits rose less than expected and inventories fell in the fourth quarter, plus home sales and exports declined in January, prompted some economists to argue the central bank should refrain from boosting borrowing costs.

Economists also cut their forecasts for economic growth in the fourth quarter after yesterday's figures. A Bloomberg news survey found the economy probably grew 2.1 per cent from a year earlier, the slowest annual pace in three-and-a-half years.

- BLOOMBERG