By Michael Heath April 6 (Bloomberg) -- Australia’s central bank raised its benchmark interest rate to 4.25 percent and signaled further increases, dismissing warnings that higher borrowing costs are already eroding consumer spending. Governor Glenn Stevens boosted the overnight cash rate target from 4 percent, the Reserve Bank of Australia said in a statement in Sydney today. The fifth increase in borrowing costs in six meetings was predicted by 13 of 23 economists in a Bloomberg News survey. The Australian currency and bond yields rose after Stevens said the move was a “further step” in returning interest rates to average levels. Today’s decision indicates central bank concerns that inflation and house-price increases will surge without greater monetary restraint, even after retail sales and home construction dropped in February. “We’ve got a way to go before we see rates at normal levels,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “There’s a good case we’ll see much stronger than normal growth rates with much higher than normal inflation and I think the RBA is aware of that.” The Australian dollar jumped to a two-week high against the U.S. currency, trading at 92.25 cents from 91.85 before the decision. Two-year government bonds fell, pushing the yield on the 5.75 percent security maturing in April 2012 up by 12 basis points to 5.07 percent, the highest since October. ‘Too High’ Stevens said last week that Australian house prices are “getting too high,” signaling he wants to minimize the danger of a housing boom and bust in the aftermath of the U.S. example. “Interest rates to most borrowers nonetheless have been somewhat lower than average,” the governor said in today’s statement. “With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.” Policy makers from India to China have joined Stevens in withdrawing monetary stimulus this year, seeking to head off asset-price bubbles as the region leads global growth. China has twice ordered banks to increase the share of their assets held in reserve and India increased interest rates last month for the first time in almost two years. Bank Indonesia today kept its reference rate at a record-low 6.5 percent for an eighth meeting. Mining Boom Australia has led the world in raising borrowing costs partly in anticipation of a surge in investment on new mines and resources that may spark price pressures. Projects such as the Chevron Corp.-led Gorgon natural gas project in Western Australia are planned to meet soaring demand from China, the world’s fastest growing major economy. Inflation in Australia reached 2.1 percent in the quarter to December, up from 1.3 percent the previous three months, while still inside the central bank’s target range of between 2 percent and 3 percent. A gauge of Australia’s inflation rose in March at five times the pace of the previous month, a report showed last week. Consumer prices advanced 0.5 percent from February, when they climbed 0.1 percent, according to an index compiled by TD Securities Ltd. and the Melbourne Institute. Today’s decision comes as Prime Minister Kevin Rudd’s government is due to hold an election within the next 12 months. More than two-thirds of the population own homes, compared with less than 50 percent in some European nations. The previous four increases added about A$200 a month to repayments on an average A$300,000 mortgage. Group of 20 Stevens was the first G-20 policy maker to raise borrowing costs twice this year. By contrast, the U.S. Federal Reserve Chairman Ben S. Bernanke said last month that the world’s biggest economy “continues to require the support of accommodative monetary policies.” The Fed has kept its benchmark rate close to zero since late 2008 and the European Central Bank’s rate is at a record low of 1 percent. Stevens brushed aside weaker recent figures suggesting a softening of economic growth in the first quarter as government fiscal-stimulus measures wane. Australian home-building approvals fell for a second month in February after the government reduced grants to first-time buyers. Demand for new homes surged in the second half of 2009 after Rudd tripled grants to first-time buyers of new homes to A$21,000 ($19,000). The grants were cut to A$7,000 on Jan. 1. Consumer Spending Retail sales also unexpectedly tumbled in February, declining by 1.4 percent. Consumer spending accounts for more than half the Australian economy. Even so, companies such as Woolworths Ltd. are reporting higher earnings. Australia’s biggest retailer said first-half profit rose 11 percent to A$1.1 billion and Harvey Norman Holdings Ltd. said first-half net income jumped 60 percent on demand for televisions. In contrast, department store operator Myer Holdings Ltd. last month cut its annual revenue forecast as the impact from the Rudd government’s decision to distribute more than A$20 billion in cash to consumers fades. Most of the money was distributed in the first half of last year. Stevens’ rate increases have pushed up mortgage rates to about 50 basis points below what policy makers have described as a “normal” level. Employers boosted the working hours of staff in February by the most since 1998, a sign the job market is poised to strengthen. Companies added 20,000 jobs last month, a report due April 8 may show, according to the median estimate in a Bloomberg survey. Australia’s unemployment rate was 5.3 percent in February, almost half the level in Europe and the U.S. Gross domestic product grew 0.9 percent in the fourth quarter from the previous three months, the most in almost two years. To contact the reporters for this story: Michael Heath in Sydney at mheath1@bloomberg.net

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