Central banks hold rates steady

When the Reserve Bank kept interest rates at 3 per cent last week, it recognised that the global economy is stabilising, after a sharp contraction in demand during the December and March quarters. This seems to be the view taken by most central banks around the world, with the UK´s Bank of England holding rates steady at 0.5 per cent this week followed by the Bank of Japan which kept its overnight call rate at 0.1 per cent.

In Japan, economic conditions have stopped deteriorating. Business sentiment has stabilised, public investment is increasing and exports and production are picking up. Signs of a rebound in global economic growth are very positive for Australia because we rely so heavily on, our economic trading partners for growth.

On the Australian front, the flow of positive news also continued this week, with two separate surveys indicating business conditions are rebounding from the lows seen earlier this year. A survey conducted by one major Australian bank found that business confidence has turned positive for the first time since 2007, with sentiment up 6 points in June from the last survey in May. Business conditions rose 12 points on a monthly basis to minus two points, while the labour market component of the index rose 18 points to minus 7 in June, its largest monthly movement in the survey’s history.

Meanwhile, the New South Wales Chamber business survey also found an improvement in sentiment, with just 43 of businesses stating the performance of the New South Wales economy was somewhat or much weaker in the current quarter, compared to 65 per cent in April. Going forward, 30 per cent of businesses expect better conditions in the coming quarter, while 47 per cent expected conditions to stay the same. Just 23 per cent of businesses expect a further deterioration in the economic climate.

This pick up in business confidence adds to recent evidence that shows that Australia’s downturn may turn out to be less severe than many expected. However, while the surveys are positive, challenges remain. In particular, there is some uncertainty about whether the improvement can be sustained in the second half of 2009, especially as the impact of cash handouts and first home owner grants is likely to fade. If the employment and income situation was to worsen, that could further weaken private consumption which would ultimately slow economic growth.

While the RBA has some flexibility to lower rates further, the current 3 per cent cash rate level seems to be working well for the economy. Any pick up in global economic activity in the next few months would further strengthen the pace of our own economic recovery.

Infochoice.com.au