By Jacob Greber Jan. 8 (Bloomberg) -- Australia’s building industry shrank in December for a second month as demand fell for new apartments and engineering construction. The index rose 1.7 points to 49.3 from November, according to a survey by the Australian Industry Group and Housing Industry Association released in Sydney today. A reading below 50 shows the industry is shrinking. The contraction follows the central bank’s decision to raise borrowing costs on Dec. 1 by a quarter percentage point to 3.75 percent, the third increase in eight weeks. Governor Glenn Stevens will boost the rate to 4 percent this quarter, investors say. “The survey results clearly show that construction conditions remain tough overall with many businesses facing on- going difficulties in securing new project work,” said Peter Burn, director of public policy at the Australian Industry Group. “The impact of higher interest rates and the removal of the first-home buyers grant boost will test the durability of the housing recovery over the coming months.” Prime Minister Kevin Rudd’s government cut grants this month to first-time buyers of newly built dwellings to A$7,000 ($6,400) from A$21,000. Traders are betting there is a 58 percent chance of a quarter-point increase in the benchmark rate to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 3:27 p.m. yesterday. The chance of a quarter-point move in March stands at 100 percent. A gauge of apartment building fell 5.8 points to 42.7 in December and engineering construction slumped 7.9 points to 41.8, today’s report said. “The reduction in engineering activity is clearly off a high base and, while still declining, commercial construction is showing early signs of improvement” thanks to A$22 billion in government spending on roads, railways and schools, Burn said. A measure of commercial building rose 1.5 points to 48.9 and house construction gained 2.3 points to 53.4 points. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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