RBA leaves rates unchanged

It was no surprise that the Reserve Bank left the official cash rate at 3 per cent this week. This is a 49 year low for Australia and is the second month in a row that the central bank has left rates steady. In his statement accompanying the decision, RBA governor Glenn Stevens noted that conditions offshore were looking more robust and that the turnaround was clearest in China.

He said: "Evidence has continued to emerge that the global economy is stabilising, after a sharp contraction during the December and March quarters. The considerable economic policy stimulus in train in most countries is helping to contain the downturn, and should support an eventual recovery."

Other economic news out this week revealed that unexpected growth in Australian exports has helped prevent Australia from falling into a recession. According to the national account data released by the Australian Bureau of Statistics, the economy grew by 0.4 per cent during the March quarter. This compares to the 0.6 per cent contraction reported for the December quarter.

While the March quarter figures should be something to hearten even the most pessimistic of economists, the reality is that the Australia is not out of the woods yet. While some of the data is suggesting that conditions domestically and offshore are starting to strengthen, the Australian economy is still in a fragile position. Business investment is still falling with a number of large projects shelved over the last few months.

The RBA’s current view is that things may still get worse before they start to pick up later in the year. It is expecting consumer spending to be weaker during the rest of the year as consumers continue to tighten their belts. By the end of 2009, the Australian economy is expected to gradually turn the corner.

Its policy making decisions will be strongly influenced by the pace of growth in countries like China and the extent to which unemployment worsens in Australia. Economists are predicting that unemployment will hit 9 per cent by 2010.

In acknowledgement of the uncertainty ahead, Governor Stevens did add in his statement that there was still some scope for more rate cuts if they were required.

"The Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity," he said.

This means that the possibility of more cuts later in the year is still very much on the cards. The board next meets on July 7, 2009.

Infochoice.com.au