Stevens Says Australia Aided By Rate Cuts, China

By Jacob Greber

May 19 (Bloomberg) -- Australia’s economy is in a good position to benefit from a global recovery later this year as interest-rate cuts drive domestic demand and a pickup in China stokes exports, central bank Governor Glenn Stevens said today.

Australia is “well placed to take part in a renewed international expansion,” Stevens said in Sydney. “That said, most observers think that the early part of any new global expansion will be characterized by pretty slow growth.”

The Reserve Bank decided against cutting its interest rate this month on signs record policy easing and government stimulus are taking effect, the board said in minutes of the May 5 meeting released today. Australia is benefiting from a sound banking system and households are responding to the lowest borrowing costs in half a century, Stevens said, after recent reports showed retail sales and mortgage lending surged in March.

“The Reserve Bank is happy with policy at the moment,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “They’re saying we’ll eventually drag ourselves out of the current downturn, but it’s going to be a drawn-out affair.”

Australia’s dollar advanced to 76.74 U.S. cents at 2:31 p.m. in Sydney from 76.47 cents before the speech was released. The two-year government bond yield climbed 9 basis points to 3.52 percent from yesterday. The S&P/ASX 200 index rose 2.2 percent to 3,817.2, led by shares in resources companies and banks.

The nation’s economy is likely to “record better outcomes than most other advanced economies in 2009 and 2010,” the central bank’s minutes said.

Government Spending

The government last week announced a A$22 billion ($16.9 billion) program of spending on roads, rail, ports, hospitals and education, adding to cash handouts to workers and families already allocated in 2008 and early this year.

“The early signs are positive” that the government’s spending is aiding the economy, Secretary to the Treasury Ken Henry said in Sydney today. “Consumer confidence has held up better than many other countries.”

Retail sales surged 2.2 percent in March from the previous month, four times as much as economists forecast. Home-loan approvals jumped 4.9 percent, the sixth consecutive gain.

The central bank cut its benchmark rate by a record 4.25 percentage points between early September and April to 3 percent.

“Certainly for the household sector, this is an expansionary monetary policy,” Stevens said today. “The way households are responding confirms that.”

China Pickup

The governor added that there are signs of “quite a significant” pickup in the economy of China, Australia’s largest trading partner. The central bank’s May 5 minutes noted that export volumes from Australia had held up better than expected in the first quarter.

The nation recorded its second-largest trade surplus on record in March as agricultural exports gained.

Employers unexpectedly added 27,300 workers in April, pushing the jobless rate down to 5.4 percent from 5.7 percent, the first drop in eight months, a report showed this month.

“Central bankers can finally see some light at the end of the tunnel,” said Michael Blythe, chief economist at Commonwealth Bank of Australia in Sydney. “While they are understandably cautious, the hint of optimism is there.”

Federal Reserve Bank of Minneapolis President Gary Stern said the U.S. economy is approaching the trough of the worst recession in at least half a century. “There have been a number of more favorable developments in recent months,” Stern said in an interview last week.

Interest Rates

The question faced by the Reserve Bank of Australia board two weeks ago was “was whether monetary policy should be eased further at this stage, or whether the cash rate should be maintained at its current level,” according to the May 5 minutes.

Investors expect Australia’s benchmark interest rate will be lower in 12 months time, according to a Credit Suisse Group index based on swaps trading.

Traders forecast the overnight cash rate target will be 8 basis points lower in 12 months, the index showed at 1:04 p.m. in Sydney. Late yesterday, they forecast 16 basis points of reductions and at the start of April, they tipped 37 basis points of adjustment.

While it’s “too soon to say” whether the global economy is rebounding, “developments over recent months are certainly consistent with the view that a recovery will get underway towards the end of the year,” Stevens said in his speech.

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