Australia’s central bank kept interest rates unchanged for a second month to gauge whether the lowest borrowing costs in 49 years will revive an economy that has probably fallen into its first recession in two decades. Governor Glenn Stevens left the overnight cash rate target at 3 percent in Sydney today after cutting it in April for the sixth time since early September. All 19 economists surveyed by Bloomberg tipped the benchmark would be kept unchanged. Australia is in a good position to benefit from a global recovery as rate cuts fuel domestic demand and a pickup in China boosts commodity exports, Stevens said last month. A report tomorrow is forecast by economists to show the economy shrank 0.2 percent in the first quarter, which is less than Japan’s 4 percent economic slump, U.K.’s 1.9 percent decline in gross domestic product and an annualized 5.7 percent drop in the U.S. “There is no reason for the Reserve Bank to act on its easing bias this month,” Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney, said ahead of today’s decision. “We expect no change for several months with the likelihood that the Reserve Bank could ease further toward year end.” Stevens and his board cut the benchmark interest rate by a record 4.25 percentage points between September and April to buttress an economy buffeted by a slump in consumer and business confidence, rising unemployment and the deepest global recession since the Great Depression. ‘Expansionary Policy’ A report tomorrow will probably confirm the economy is in a recession for the first time since 1991 following the fourth quarter’s 0.5 percent contraction, according to a Bloomberg survey of 18 economists. “Certainly for the household sector, this is an expansionary monetary policy,” Stevens said on May 19. “The way households are responding confirms that.” Households with an average mortgage of A$250,000 ($201,500) are paying A$7,000 a year less in repayments than they were at the start of September, which is equal to about 8 percent of family incomes, according to Reserve Bank calculations. Retail sales advanced for a second month in April, new home sales gained for a fourth consecutive month and the manufacturing industry’s contraction eased in May, according to reports released yesterday. Building Approvals Woolworths Ltd., Australia’s largest retailer, said last month that sales surged 6.5 percent to A$12.3 billion in the three months ended April 5. Metcash Ltd., the nation’s biggest grocery wholesaler, said yesterday that revenue climbed 8.5 percent in the year through April 30. Home-building approvals rose 5.1 percent in April, the third straight gain, according to the report today. In contrast, business investment tumbled at the fastest pace on record in the first quarter, dropping 8.9 percent from the previous three months. Corporate profits slumped 7.2 percent in the quarter, the statistics bureau said yesterday. “The timing of additional monetary policy easing is in part a tactical decision,” Bill Evans, chief economist at Westpac Banking Corp. in Sydney, said ahead of today’s decision. “With the unemployment rate set to rise sharply, this will create an environment in which the bank is likely to feel the need to provide additional stimulus.” The jobless rate climbed to 5.4 percent in April from 3.9 percent in February 2008 as companies including Qantas Airways Ltd. fired workers amid a drop in business class travel. Global Rates Policy makers in Europe and the U.K. are expected to join Australia in keeping borrowing costs unchanged this week. The European Central Bank will leave its benchmark rate at a record low of 1 percent and the Bank of England will keep its rate at 0.5 percent on June 4, economists predict. Investors expect Australia’s overnight cash rate target will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading. Traders forecast the overnight cash rate target will be 21 basis points higher in 12 months, the index showed at 9:02 a.m. in Sydney. At the start of May, they tipped 37 basis points of reductions. A basis point is 0.01 percentage point. While Australia “is well placed to take part in a renewed international expansion,” most observers think that the early part of any recovery “will be characterized by pretty slow growth,” Governor Stevens said last month.

Source