Australia May Keep Key Rate at 3% for Third Month (Update1)

july7 Australia’s central bank may leave interest rates unchanged for a third month amid signs the lowest borrowing costs in half a century and government spending are helping the economy skirt the global recession.
Reserve Bank Governor Glenn Stevens will keep the overnight cash rate target at 3 percent at 2:30 p.m. in Sydney today, according to all 20 analysts surveyed by Bloomberg News.
Australia was one of few major economies including China and India to grow in the first quarter as government cash handouts and rate cuts stoked consumer spending. Growth may slow after reports recently showed exports dropped to a 14-month low, bank lending fell, home building approvals declined by the most since 2002 and job advertisements tumbled for a 14th month.
“The bank has been in ‘watch-and-wait’ mode, assessing the impact of previous aggressive rate cuts,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. “The bank is unlikely to see an immediate need for additional stimulus.”
Governor Stevens, who slashed borrowing costs by a record 4.25 percentage points in six moves between September and April, said last month he has scope to cut rates further if needed.
Australia’s “smaller downturn than most countries” reflects the nation’s limited exposure to “financial excesses that have been the problem in some other countries, as well as the good fortune of our position in relation to China,” Stevens said on June 4.
Economic Growth
Gross domestic product rose 0.4 percent in the first quarter from the previous three months, in contrast to a 3.8 percent decline in Japan and a 1.4 percent contraction in the U.S.
Retail sales increased 1 percent in May, twice as much as economists estimated, buoyed by spending at department stores and restaurants. The services industry expanded for the first time in 15 months in June.
The surge in spending is boosting earnings at companies including David Jones Ltd. The nation’s second-largest department store chain said last week that earnings after tax will rise by between 20 percent and 30 percent in the six months ending July 25.
Prime Minister Kevin Rudd’s government has distributed A$12 billion ($9.6 billion) in cash handouts to households this year and is spending A$22 billion to upgrade roads, railways, ports and schools.
Mortgage Repayments
“The combined impact of fiscal and monetary policy easing has been more effective in boosting spending and confidence than even the optimists had hoped,” said Richard Gibbs, a senior economist at Macquarie Group Ltd. in Sydney.
“While recent reports suggest there is no urgent need for lower mortgage interest rates, they nevertheless will need to be kept low for an extended period.”
Households with an average A$250,000 home loan are paying A$7,000 a year less than they were at the start of September, which is equal to about 8 percent of family incomes, according to Reserve Bank calculations.
“Our expectation remains that the economy will be well placed for expansion toward the end of this year,” Stevens said on June 4.
Policy makers in the U.S., Europe and the U.K. are also keeping borrowing costs unchanged to spur their economies. The European Central Bank left its benchmark rate at a record low of 1 percent on July 3, and the Bank of England will keep its rate at 0.5 percent on July 9, economists predict. The U.S. Federal Reserve has held the overnight lending rate at between zero and 0.25 percent since December.
Asia Recovery The cash rate is “all but certain to be left on hold,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “Conditions in the Australian economy have improved, with confidence, spending and housing lending markedly stronger, while V-shaped recoveries are emerging in Asia.”
China’s manufacturing expanded for a fourth month in June, Japan’s industrial output rose for a third month in May and South Korean manufacturers’ confidence reached a nine-month high in July, recent reports show.
Signs of a pickup in Australia’s economy have prompted investors to increase bets the benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.
Traders forecast the key rate will be 55 basis points higher in a year, the index showed at 12:19 p.m. in Sydney. After the bank’s June 2 meeting, they tipped 26 points of gains.