Rates on hold in June: economists

SIGNS of stabilisation in the global economy should convince the RBA to leave official interest rates unchanged.

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SIGNS of stabilisation in the global economy should convince the Reserve Bank of Australia (RBA) to leave official interest rates unchanged at its board meeting next week.

But economists say there is a chance of more rate cuts towards the end of 2009, if domestic and offshore economic conditions worsen.

All 20 economists surveyed expect the cash interest rate to remain unchanged at a 49-year low of 3 per cent, following the central bank's June board meeting on Tuesday June 2.

RBC Capital Markets senior economist Su-lin Ong said the central bank will keep rates steady following further tentative signs of that the world economy is stabilisation.

"I think the bias to ease is still there,'' she said.

"But if the globe looks like it can stabilise and be on a firmer footing by year end, which is the RBA's base case scenario, then there may well not be a need for more cuts in Australia.''

In the minutes of its May board meeting released last week, the RBA said it "viewed it as appropriate to make smaller and less frequent adjustments to the cash rate'', citing historically low interest rates and signs of stabilisation in the world economy.

Between last September and April this year, the RBA cut rates by 425 basis points.

In signs the global downturn may have bottomed out, Japan's industrial output in April rose at the fastest monthly pace in more than half a century as production of electronic parts and chemicals picked up, official figures showed today.

The April reading, a jump of 5.2 per cent from the previous month, was far above market expectations for an increase of around 3.3 per cent, sparking hopes that the nation is emerging from its worst post-war recession.

Also, China's statistical bureau released data in May showing the country's retail sales jumped 14.8 per cent in the year to April, while industrial output rose 7.3 per cent, also in the year to April.
Ms Ong said there was a chance the RBA would resume cutting rates in the September and December quarters.

"We've got further cuts factored in, but that's in case the global recovery disappoints,'' she said.

While all economists surveyed were unanimous there would be no rate change in June, some predicted a worsening domestic economy would force the RBA's hand in the second half of 2009.

Treasury forecasts in the 2009/10 federal budget handed down two weeks ago project the unemployment rate to reach 8.25 per cent next financial year before peaking at 8.50 per cent in 2010/11.

The nation's jobless rate was 5.4 per cent in April.

St George Bank economist Amanda Tan said a rising jobless rate could make room for a 50 basis point cut in the September quarter.

"The fact that unemployment rates are likely to increase, that's the reason why we're seeing the risk of two more interest rate cuts of 25 basis points priced in,'' she said.

"But if we see a continued improvement in financial market conditions, then that could cause the Reserve Bank to leave interest rates on hold.''

But Moody's Economy.com economist Matt Robinson said the RBA was not like to make further rate cuts.

"We haven't ever seen the central bank cut by 425 basis points in the space of six months before,'' he said.

"They've front loaded all the rate cuts they'd make during the times of rising unemployment.

"If unemployment gets up to the high sevens (per cent), 3 per cent now is quite a reasonable monetary stunt.''