Wednesday, July 08, 2009

It's getting closer - RBA

The Reserve Bank believes China's economic recovery is already helping Australia and that the ailing United States economy could be "approaching a turning point".

The unusually upbeat pronouncement accompanied the Bank's announcement that it would keep its cash rate on hold for the third successive month while standing ready to cut it again "if needed".

Ahead of an update from the International Monetary Fund's due tonight the Reserve Bank said it believed the global economy was "stabilising", with "downside risks diminishing".

"Growth in China has strengthened considerably," it said. "This is having an impact on other economies in the region...

...including Australia."

In the Bank's first suggestion that it believes the United States economy could be about to pick up it says it sees "tentative evidence that the US economy is approaching a turning point".

While conditions in Europe are still weak, "the considerable economic policy stimulus in train around the world should support recovery", the Bank says, "although slowly at first".

The statement raises the possibility of an Australian economic recovery sooner than the Bank's current official forecast of early next year by describing Australian conditions as "not as weak as expected a few months ago".

While business borrowing has been shrinking, the Bank says demand for home loans and home prices are picking up and that interest rates are in any event very low by historical standards, despite some recent increases in bank margins.

The Bank credits both "fiscal measures" and its own lower interest rates with Australia's resilience in an explicit acknowldegment of the effectiveness of the government's multi-billion stimulus stimulus packages.

On reading the statement Commonwealth Bank economist John Peters said he now found it "hard to see the central bank moving to ease rates again in the near term".

JP Morgan economist Helen Kevans went further declaring that "the next move in the official rate will be up, rather than down".

"Previously, we expected two small rate cuts from later this year," she said. "Our view now is that, given the unprecedented policy stimulus in place, the Bank will not wait for the unemployment rate to peak before starting to take back the current policy accommodation".

The Bank's statement holds open the possibility of at least one more rate cut, saying that in assessing how it might use its scope to ease, it would "continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery."

Published in today's SMH and Age