SYDNEY (Sept 2): Australia's economy lost momentum in the second quarter as higher borrowing costs and costly fuel squeezed households, though growth beat expectations to keep a near-term interest rate hike firmly in play.

Markets responded by boosting the odds of a fourth rate hike from the Reserve Bank of Australia (RBA) this month to 57%, from 48% before. A move by November has been more than fully priced in, with the risk of another hike early next year. 0#AUDIRPR

Real gross domestic product (GDP) rose a moderate 0.4% in the second quarter, data from the Australian Bureau of Statistics (ABS) showed on Wednesday, just above market forecasts of a steady 0.3% gain.

Annual growth dropped to 2.1%, from 2.5%, but topped forecasts of 1.8%. That was above the RBA's forecast of 1.9% and higher than the 2% speed limit the central bank believes can be sustained without generating inflation.

"With GDP growth and inflation holding up better than the RBA had anticipated, the bank will probably hike rates again before long, perhaps as soon as this month," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

"The key point is that the economy is still growing close to trend, which means that the existing excess capacity isn't being eroded."

The RBA has lifted interest rates three times this year in an attempt to curb inflation but with limited success. Consumer inflation in July eased to 3.5% but the trimmed mean measure remained stubborn at 3.6%, with both well above the central bank's target band of 2% to 3%.

Ten-year bond yields hit a 15-year high of 5.22% on Wednesday, as renewed fighting between Iran and the US sent oil prices surging and fuelled inflation fears.

For the quarter, net exports added 0.1 percentage point to growth, while public demand also contributed a meagre 0.1 ppt. Household consumption added 0.2 ppt, driven mostly by the purchase of EVs.

The ABS noted that the Middle East conflict influenced spending behaviour with falls in fuel consumption in response to elevated prices, and reduced domestic and international travel, but the purchase of vehicles jumped 10% in the quarter, contributing 0.3 ppt to growth alone.

"The rise in electric vehicle purchases may have reflected households taking a longer-term approach to cost of living pressures, with some choosing EVs to help reduce ongoing expenses," said Grace Kim, ABS head of national accounts.

Business investment fell 0.5% and shaved 0.1 ppt off GDP growth, after a record quarter in investing in data centre machinery and equipment. Dwelling investment rose 1.6%, supported by an ongoing pipeline of work.

The property downturn is biting beyond prices, with ownership transfer costs, largely composed of stamp duty receipts and real estate commissions, falling 1.9% from the first quarter and making no contribution to growth.

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