RBA unlikely to move again until after May

While markets have been distracted by the global outbreak of swine flu this week, there was some good economic news for Australia. US gross domestic product data for the March quarter was released on Wednesday and signs are emerging that the US economy is stabilising. Market participants have been anxiously waiting for the release of this indicator after data for the December quarter showed that the US economy contracted by a shock annual rate of 6.3 per cent.

In contrast, the first quarter GDP figures showed the US economy contracting by a more modest annual rate of 6.1 per cent. There’s no doubt that three consecutive quarterly contractions are not great news from an economic point of view. However, the March quarter data is significant because it has given economists a small glimmer of hope that the US recession is easing.

Data from the US Commerce Department showed that consumer spending increased by 2.2 per cent which is positive for the US economy given it accounts for nearly two-thirds of economic activity. As a result, the US Federal Reserve kept interest rates unchanged. They are currently sitting in a range between 0 and 0.25 per cent.

While this type of overseas economic news will give the Reserve Bank some comfort that the deterioration in global conditions is slowing, Australia still needs to get through the difficult 12-18 month period ahead. While the outlook for Australia is looking grim and an economic recovery is not forecast until 2010-11, the RBA is still likely to keep rates on hold when it meets on May 5. The reality is that it can’t really move again until it has greater clarity about the Federal Government’s fiscal policy intentions. These will be announced by the Treasurer in the upcoming Federal Budget on May 12.

There is more talk of additional fiscal stimulus which will have a big impact on the Reserve Bank’s decision making process. The official cash rate in Australia is now 3 per cent and market analysts expect it to drop to 2 per cent by the end of 2009.

New Zealand’s central bank cut interest rates this week by 50 basis points, which is a record low 2.5 per cent.

Infochoice.com.au