RBA Says Australian Rate Cuts Helping Stoke Demand

Australia’s benchmark interest rate at a half-century low of 3 percent is helping drive economic growth amid signs domestic demand is more resilient than expected, the central bank said.
“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation,” while still giving the bank scope to cut borrowing costs “at a later stage” if needed, policy makers said in minutes of their July 7 meeting released in Sydney today.
The full impact of Reserve Bank of Australia Governor Glenn Stevens’ decision to slash the overnight cash rate target by a record 4.25 percentage points between September and April will “still be coming through for some time,” the minutes said. Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, research company Access Economics said today.
“The Reserve Bank seems to be tentatively saying the worst is over,” said Annette Beacher, senior fixed-income strategist at TD Securities Ltd. in Singapore. “I got the impression that if they are going to ease, that would be at a later stage.”
The Australian dollar traded at 81.33 U.S. cents at 2:50 p.m. in Sydney from 81.22 cents before the minutes were released. The two-year government bond yield was unchanged at 4.02 percent.
Rate Unchanged
Policy makers left the benchmark rate unchanged two weeks ago for a third month after a report showed gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after shrinking 0.6 percent in the fourth quarter. Economists had forecast a 0.2 percent contraction.
“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” today’s minutes said.
Further signs that the economy isn’t as weak as expected include “surprisingly strong” exports, helped by demand from China, reports that some mining companies and ports are “again operating close to capacity,” rising household spending, car sales and demand for homes, the minutes said.
The number of cars sold in June rose 5.7 percent, the third month of gains, to the highest level since August 2008, a government report showed today.
Global Economy
There are “further signs of stabilization in the world economy,” the central bank said today. “In Japan, recent data had been more encouraging than they had been for some time.”
The Bank of Japan last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the BOJ said, while adding that the economic outlook is “uncertain.”
China’s economy grew a stronger-than-expected 7.9 percent in the second quarter from a year earlier, a report showed last week. Singapore’s GDP also expanded faster than anticipated.
For Australia, “the outlook remained for a gradual recovery to begin later in the year,” the Reserve Bank said.
While the labor market is likely to remain “soft for some time,” there are signs employers are trying to limit job cuts.
“The current inflation outlook afforded scope for some further easing of monetary policy, if that were to be needed to give further support to demand at a later stage,” the bank said.
Consumer Prices
Consumer prices probably rose 1.5 percent in the second quarter from a year earlier, slowing from an annual 2.5 percent gain in the first quarter, according to the median estimate of 19 economists surveyed. The consumer price index will be released at 11:30 a.m. in Sydney tomorrow.
The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of Canberra-based Access Economics said in a report today. Three months ago, Access forecast a 0.2 percent decline.
“Australia made it through the most dangerous phase of the global recession with only collateral damage,” Richardson said.
Investors have increased bets Australia’s 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 76 basis points higher in a year, the index showed at 2:43 p.m. in Sydney. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.
“We appear to be getting to the bottom end of the interest rate cycle,” Westpac Banking Corp. Chief Executive Officer Gail Kelly said at a business lunch in Sydney today.