Australia's central bank held its key cash rate at a record low of 3 per cent today, saying the full effect of past stimulus had yet to be felt and pointing to signs of stabilisation abroad.
The decision was widely expected but investors detected an optimistic tinge to the Reserve Bank of Australia's (RBA) post-meeting statement, and moved to price in less chance of further easing and a higher Australian dollar.
“It appears the RBA may think it has done enough for this cycle,” said Peter Jolly, head of research at National Australia Bank. “You would need a faltering in the recovery to drive the RBA back to rate cuts.”
The central bank has already chopped rates by a massive 425 points since September, easily the most aggressive easing since the prior recession of 1991.
The Labour government has also waded in with over A$52 billion ($38.5 billion) in stimulus and is likely to announce more spending it its annual Budget next week.
“Much of the effect of these changes is yet to be observed,” said RBA Governor Glenn Stevens.
“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 made it quite clear that with the stimulus in the system, and the improvement in financial markets, they are happy to leave the cash rate where it is,” said Warren Hogan, head of Australian economics at ANZ. “I imagine that will remain the case for the next few months.”
Notably, Stevens pointed to signs of a recovery in China as reason for optimism. China is Australia's single biggest trading partner and a key driver of commodity prices.
Yet, analysts also noted that recent domestic data pointed to a deepening recession in Australia, with unemployment in particular rising sharply to a five-year high of 5.7 per cent. Official jobs data for April are due on Thursday and are expected to show a further increase to 5.9 per cent.
The economy contracted by 0.5 per cent in the final quarter of last year and the central bank expects it to shrink in the whole of 2009, marking its first full-year contraction since the 1991 downturn.
“Any signs that a recovery doesn't start to come through in the second half could be a trigger for further rate cuts," said ANZ's Hogan. “We are still going for 2 per cent, because we're a bit concerned about the effect of rising unemployment.”
Reuters