Australia keeps key rate unchanged at 3% amid signs of pick-up

Tuesday 5th May 2009

The Reserve Bank of Australia kept its benchmark interest rate unchanged at a 49-year low, saying monetary and fiscal policy is stimulatory and there are signs of stabilization in some overseas economies.

The central bank kept the overnight cash rate target at 3% today, matching economists’ expectations and Governor Glenn Stevens said the bank will monitor how economic and financial conditions unfold before deciding further interest rate cuts are needed.

“The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery,” Stevens said in a statement posted on the RBA website. In Australia, “the stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.”

The RBA has slashed its key rate by 4.25 percentage points since September helping underpin an economy that’s slumped less than most of its trading partners.

Prime Minister Kevin Rudd signaled last month that further fiscal stimulus will be announced in the May 12 budget, adding to some A$90 billion being spent on infrastructure projects, grants for low-income people and support to the bond market.

“We are comfortable to maintain our view that there will be further rate cuts over the course of 2009, although we expect that the Bank will choose to extend the pause to June before moving more aggressively later in the year,” said Bill Evans, chief economist at Westpac Banking Corp. “We expect that a more aggressive move will more than proportionally increase the impact of monetary policy on economic activity.”

Australia’s economy shrank 0.5% in the fourth quarter and economists say it contracted further in the first three months of the year. The nation’s jobless rate rose to 5.7% in March and is forecast to have reached 5.9% in April.

Stevens said the global economy contracted in the first few months of 2009. Still, while the near-term outlook remains weak, “there are further signs of stabilisation in several countries,” he said.“The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little,” he said."

Conditions in global financial markets remain generally on a path of gradual improvement, with equity prices off their lows, term spreads declining and capital markets re‑opening,” Stevens said.

“Confidence remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality," he said "Credit remains tight. Continued progress in restoring balance sheets remains essential to durable recovery.”

Businesswire.co.nz

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