By Sarah McDonald Sept. 8 (Bloomberg) -- Traders reduced bets on an interest rate cut in October to the least in a month after the Australian economy grew faster than forecast and the central bank said the nation is well placed to withstand global market turmoil. Reserve Bank of Australia Governor Glenn Stevens said yesterday policy makers have the flexibility to “maintain steady settings” while markets are unstable. Rising consumer spending and a rebound in exports drove the economy’s 1.2 percent growth in the second quarter, versus the 1 percent gain predicted by economists, the statistics bureau said yesterday. The yield on the October cash-rate future rose as high as 4.62 percent yesterday from 4.48 percent the day before, implying a 54 percent chance of a 25 basis-point cut next month. On Aug. 9, the contract was pricing in 91 basis points of reductions. The two-year bond yield surged 15 basis points to 3.76 percent yesterday, the biggest increase since Feb. 4. Australia is the only developed nation where all government notes yield less than the central bank’s key interest rate. “This gross domestic product report should help to convince markets that it’s not a domestic weakness story that they should be pricing in,” said Paul Bloxham, chief economist for HSBC Holdings Plc in Sydney and a former RBA official. “If the pricing is going to stay for an expectation of cuts, it’s got to be on the grounds of some sort of international event.” Australian sovereign bonds have returned 10.3 percent this year, the best among 21 developed nations tracked by Bloomberg and the European Federation of Financial Analyst Societies. Household Spending Household spending, which accounts for 55 percent of Australia’s economy, rose 1 percent in the second quarter, adding 0.5 percentage point to GDP growth, yesterday’s report showed. The nation’s household savings ratio declined to 10.5 percent in the three months through June from 11.7 percent in the first quarter, the highest since the second quarter of 2009. Private consumption was “the main upside surprise” in yesterday’s report, Annette Beacher, head of Asia-Pacific research at TD Securities Inc., said in a note to clients. “Now that the temporary soft patch is firmly in the rear-view mirror, we expect investment and exports to continue driving the economy to above-trend growth over the coming year.” The economy will expand 4.3 percent in 2012, the fastest pace since 2007, according to analysts surveyed by Bloomberg. U.S. growth will reach 2.35 percent and Europe will expand 1.4 percent, the surveys show. Commodity Exports Australia’s economy is being driven by commodity exports including iron ore and coal, with mining investment in the 12 months to June 30, 2012 projected at A$82.1 billion ($87 billion), 45 percent higher than a year prior, the government said last week. Business profits advanced last quarter by more than double economists’ estimates as resources and utility companies benefited from higher prices, a Sept. 5 report showed. “RBA officials are a long way from abandoning their core belief that the mining investment boom is unusually large, and that it is resilient to the current troubles in markets,” Stephen Walters, a Sydney-based economist for JPMorgan Chase & Co. said in a research note after Stevens’ speech yesterday. Households watching global and local events “may continue their precautionary behavior” and help weaken demand, Stevens told the Western Australian Chambers of Commerce and Minerals & Energy in Perth. “If so, that may act to curtail the upward trend in inflationary pressures that has, up to this point, appeared to be in prospect,” he said. Consumer Prices Bond investors are estimating Australian consumer prices will rise at an annual 2.59 percent pace over the coming five years, according to the gap between indexed government debt and bonds that aren’t linked to inflation. To help contain resource-fueled price pressures, Stevens boosted borrowing costs in seven quarter-percentage-point steps from October 2009 to November last year. He held the key rate at 4.75 percent for a ninth straight meeting on Sept. 6, citing “unsettled” international markets. “It is too soon to see much evidence of a concrete impact of these events on the global economy,” Stevens said yesterday. Citigroup Inc. and UBS AG are among banks to cut forecasts for global growth as the sovereign crisis that began in Greece spreads to larger European economies and threatens the region’s common currency, while U.S job growth stagnates. U.S. 10-year Treasury yields fell to a record low 1.9066 percent on Sept. 6. The equivalent Australian note offered 229 basis points of additional yield yesterday. The Australian dollar, the world’s fifth-most traded currency, has gained 16 percent against the greenback in the past year and bought $1.06 as of 5:42 p.m. in Sydney yesterday. ‘Chipped Away’ Australian employers added 10,000 jobs in August, according to the median estimate of 24 economists before a government report scheduled today. Employment in the U.S. unexpectedly stagnated in the same month, when payrolls were unchanged, the weakest reading since September 2010. “The expectations for severe rate cuts have been chipped away over the course of this week but the market’s still looking for substantial rate cuts and what’s really driving that is expectations of tail risk from the global economy,” said Joshua Williamson, a senior economist at Citigroup in Sydney. “It’s something we have to live with until the market is convinced that Europe and the U.S. are not going to revisit the 2008 period.” --With assistance from Candice Zachariahs in Sydney. Editors: Ed Johnson, Garfield Reynolds To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net. To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.

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