Australia's central bank signalled on Tuesday it was likely to keep interest rates on hold at a record low of 3 percent as it awaited more evidence of a lasting economic recovery, but cautioned against expectations for a dramatic return to growth.
Reserve Bank of Australia (RBA) Governor Glenn Stevens pointed to clear signs of a global economic pick-up, reinforcing the market's view that he would leave rates unchanged next month.
But Stevens said he did not expect the domestic economy, widely considered to be in recession, to bounce back to above-average growth quickly, indicating that an increase in official rates could still be some way off. Most observers reckon the Australian economy slipped into recession last quarter, the first since 1991. "Of course the level of rates here in Australia are pretty low, in fact quite low if you look at history," Stevens told the Canadian Australian Chamber of Commerce.
Stevens' latest comments, though guarded, seemed to echo an emerging theme among global central bankers who are finally seeing some light at the end of the tunnel, even if the timing and strength of a recovery are still far from clear.
"It is too soon to say this is beginning yet.... (and) most observers think that the early part of any new global expansion will be characterised by pretty slow growth," Stevens said.
Later in the day, the minutes of the RBA's last meeting on rates noted that it did not expect growth to resume until around end-2009. The central bank is due to review monetary policy on June 2 after it kept rates steady in May, and the interest-rate swap market assumes the meeting will make no change.
The Australian dollar was firmer $0.7672, more than 2 percent higher from late in Sydney trade on Monday as investors bought higher-yielding currencies on hopes for global recovery. "The minutes sounded a bit more optimistic than prior meeting minutes...," said George Tharenou, economist at UBS. "This suggests to us they still have a bias to ease, but are on hold at the moment," he added.
The RBA has cut its key cash rate by 425 basis points since September to cushion the economy from the global downturn. In keeping rates unchanged this month, the central bank cited huge monetary and fiscal stimulus in the pipeline and signs of a global recovery.
Australia is seen as an indicator of Asian and global growth because it is a major exporter of industrial raw materials needed to keep factories humming. But analysts said there were a number of risks to recovery, pointing to forecasts of rising unemployment, falling business investment and some question marks over the housing sector. Market watchers fear unemployment could top 8 percent next year from 5.4 percent in April, though the latest monthly figure was not as bad as expected.
"They (the RBA) don't want to be too optimistic too quickly as they realise there are still soft patches in the global economy," said Stephen Roberts, economist at Nomura. Federal Reserve Chairman Ben Bernanke said this month that the US economy had bottomed out and would turn up this year. On Monday, US Treasury Secretary Timothy Geithner said the economy had stabilised, although a recovery would be bumpy.
China's central bank has also recently been talking up prospects for recovery, predicting domestic growth to accelerate to around 8 percent by year-end. China is Australia's single largest trading partner and a major consumer of its commodities. "Globally, our focus remains on the durability of the pick up in Chinese growth since the start of the year," said Su-Lin Ong, senior economist at RBC Capital. She expects Australia's official cash rate to bottom at 2.5 percent, another 50 basis points below the current rate.