Australia Leaves Key Interest Rate Unchanged at 3%

By Jacob Greber

May 5 (Bloomberg) -- Australia’s central bank kept its benchmark interest rate unchanged to gauge whether the lowest borrowing costs in 49 years and government spending will pull the economy out of its first recession in two decades.

Governor Glenn Stevens left the overnight cash rate target at 3 percent in Sydney today after cutting it by a quarter point last month, the sixth reduction in eight months. Eighteen of 19 economists surveyed by Bloomberg forecast today’s decision.

While Australia’s economy is shrinking amid a slump in global demand for exports and weaker consumer spending, Stevens said today that government spending, lower borrowing costs and a pickup in China will drive a rebound. Stevens has more scope to cut rates in coming months to spur an economy he expects will recover later this year.

Today’s statement “hints at a wait-and-watch stance,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It’s clear we’re getting closer to the end of this easing cycle.”

The Australian dollar rose to 74.08 U.S. cents at 2:57 p.m. in Sydney from 73.91 cents before the decision was announced and 74 cents in New York yesterday. The two-year government bond yield gained 3 basis points to 3.33 percent. A basis point is 0.01 percentage point.

“The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead,” Stevens said today in a statement.

Record Cuts

In deciding whether future rate cuts are needed, policy makers will “monitor how economic and financial conditions unfold, and how they impinge on prospects for a substantial recovery in economic activity,” he added.

Stevens and his board have reduced the benchmark rate by a record 4.25 percentage points since early September as companies including Qantas Airways Ltd. and BHP Billiton Ltd. fire workers to offset waning demand for travel and raw materials.

With demand for workers weakening, wages will rise at a slower pace, helping “inflation to continue to abate,” Stevens said today.

Australia’s jobless rate probably rose to 5.9 percent in April, the highest level in almost six years, according to the median estimate of 19 economists surveyed by Bloomberg. The employment report will be released on May 7. Unemployment rose by the most in 18 years in March, climbing to 5.7 percent from 5.2 percent.

Government Stimulus

The full effect on the economy of interest-rate cuts and almost A$90 billion ($67 billion) in government spending on grants, infrastructure and bond-market assistance since October are “yet to be observed,” Stevens said.

Prime Minister Kevin Rudd signaled on April 21 that further stimulus will be provided in the government’s May 12 budget.

Australia’s gross domestic product declined 0.5 percent in the fourth quarter from the previous three months, a report showed on March 4. By contrast, the U.S. and U.K. economies both shrank 1.6 percent. Japan contracted 3.2 percent.

Recent reports support Stevens’ view that lower borrowing costs and government spending are reviving the economy. Home- loan approvals rose for a fifth month in February and consumer confidence jumped in April by the most since August. Business sentiment gained in March for a second month.

“Monetary policy has been eased significantly,” Stevens said, and market and mortgage rates “are at very low levels by historical standards, and business loan rates are below average, reducing debt-servicing burdens considerably.”

Mortgage Savings

Households with an average-sized mortgage of A$250,000 are paying A$7,000 a year less than they were six months ago, which is equal to 8 percent of average family incomes, according to the Reserve Bank.

Stevens said that while the near-term outlook for the global economy “remains weak,” there are further signs of stabilization in several countries.

“The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little,” he said. China is Australia’s largest trade partner.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net