Wednesday, May 06, 2009

Now for the good news

Things are about to get better, in the view of our Reserve Bank. Let's hope.

AUSTRALIA'S Reserve Bank sees good times just around the corner and will this week publish forecasts pointing to a recovery before the end of this year.

The cautiously upbeat assessment lies behind the Bank's decision to leave interest rates on hold Tuesday and leaves open the possibility that it will not cut rates again.

The Bank is encouraged by signs that China's economy has picked up in recent weeks and that Korea has returned to positive growth.

It also believes that commodity prices may have stopped falling and noted in the statement released after the board meeting that many commodity prices had firmed a little".

It is placing considerable store on reaction to the results of the results of the "stress tests" on US financial institutions due for release Thursday...

A widespread positive reaction could mark a turning point in global confidence.

On the home front the Bank believes that Australia is in recession but that most of the effect of its six interest rate cuts is yet to be felt.

The Bank began cutting rates in September - only eight months ago. Its models suggest that the effects of each rate cut builds and peaks at around 18 months, suggesting that the cuts it has cuts it has made to date will have a powerful effect in the months ahead without the need for further ones.

It is aware too that the most-recent round of stimulus payments has yet to be spent and that next week's Budget should provide a further modest boost to the economy, although it has not been briefed on the contents of the Budget.

It will release its economic forecasts, which often differ from those of the Treasury, on Friday just a few days ahead of Tuesday's Federal Budget.

It will stress that there is greater than usual uncertainty surrounding its views and that unforeseen events could push the economy in either direction.

Just as the collapse of Lehman Brothers in the United States in September triggered the wave of fear that brought on the global recession, the response to the this week's US stress tests could either boost confidence, leading the world out of recession or further depress it, cutting short the early signs of recovery.

The Bank believes that it is possible it may not need to cut its cash rate again below its current long-term low of 3.0 per cent, but it stands ready to cut should it need to in response to signs that the economy is not recovering as it expects.

During Tuesday's board meeting the Bank received welcome news on building approvals suggesting that house and unit construction is now on an upward trend.

Building approvals rose by a seasonally-adjusted 3.5 per cent in March after an upwardly revised 8.0 per cent in February, ended seven months of falls.

Victoria's bounce-back was the strongest in the nation. Its building approvals have been growing for four consecutive months and are 30 per cent higher than their trough in November.