Australia freezes interest rate as inflation may slow growth

By Jacob Greber  |   2008-7-2  |     NEWSPAPER EDITION

AUSTRALIA'S economic growth rate will slow as the highest borrowing costs in 12 years and record gasoline prices force households to cut spending, central bank Governor Glenn Stevens said yesterday.

"While the inflation outlook remains concerning, the board's assessment continues to be that demand growth will be moderate this year," Stevens said in Sydney.

The Reserve Bank left its benchmark interest rate at 7.25 percent for a fourth month as slumping stock markets, surging fuel prices and a drop in employment erode consumer confidence.

The currency fell by the most in two weeks after Stevens said four rate increases between August and March should cool inflation "over time" from the fastest pace in almost 17 years.

"The Reserve Bank is signaling that it has done enough," said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. "Slower growth will lead to slower inflation outcomes, but the process takes time."

The Australian dollar fell to 95.60 US cents at 4:37pm in Sydney from 95.78 US cents just before the decision was announced. The two-year government bond yield declined 3 basis points to 6.85 percent.

"The board's judgment is that the current stance of monetary policy remains appropriate," Stevens said yesterday. The bank's decision to leave the cash rate at 7.25 percent was forecast by all 25 economists surveyed by Bloomberg News.

"Inflation is likely to remain relatively high in the short term and the consumer price index will be further boosted in coming quarters by the recent rises in global oil prices," Stevens said.

"Looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected."