Australia outpaces rest of world in Q2

By Wayne Cole

SYDNEY (Reuters) - Australia's economy grew at its fastest pace in over a year last quarter as aggressive policy stimulus drove a revival in consumer and business spending, supporting the case for an early rise in interest rates.

The annual pace of growth of 0.6 percent was also the highest of any developed nation, one reason investors are betting it will lead the world in reversing past rate cuts.

As a result the local dollar rose while bill futures slipped as investors priced in a greater chance the Reserve Bank of Australia (RBA) might tighten as early as November.

"Another quarter where growth has exceeded the Reserve Bank's expectations," said David de Garis, a senior markets economist at National Australia Bank. "It's not yet at that point where they are ready to pull the pin on the first hike, but November is a live date at this time."

By one measure markets were now almost fully priced for a hike to 3.25 percent in November, while a Credit Suisse gauge shows 176 basis points of tightening is already factored in for the next 12 months.

The RBA itself kept rates at a record low of 3.0 percent after its monthly policy meeting on Tuesday and surprised some by saying such a stimulatory policy was justified for now given lingering uncertainties at home and abroad.

A slump in global share markets in the last couple of days had stirred fresh concerns about the world outlook.

Yet, Australia was still out-performing most of the developed world, thanks in large part to a stable banking system and China's insatiable demand for resources.