More upbeat central bank holds fire on Aussie rates

Australia's central bank kept interest rates unchanged for a third month amid signs the lowest borrowing costs in half a century and government spending are helping the economy skirt the global recession.

Reserve Bank Governor Glenn Stevens left the overnight cash rate target at 3 per cent in Sydney yesterday, as forecast by all 20 analysts surveyed by Bloomberg News.

Australia was one of the few major economies, including China and India, to grow in the first quarter as government cash handouts and rate cuts stoked consumer spending. Growth may slow after recent reports showed exports dropped to a 14-month low, bank lending fell, home building approvals declined by the most since 2002 and job advertisements tumbled for a 14th month.

There is still "some scope for further easing of monetary policy, if needed", said Stevens, who slashed borrowing costs by a record 4.25 percentage points in six moves between September-April.

"Economic conditions in Australia have, to date, not been as weak as expected a few months ago," he said.

"The Reserve Bank is becoming slightly more upbeat about the global and Australian economies," said Brian Redican, a senior economist at Macquarie Group in Sydney.

Policy makers are also sending "a clear message that they're not thinking of raising rates anytime soon".

Signs of a recovery in the Asia region include recent reports showing China's manufacturing expanded for a fourth month in June, Japan's industrial output rose for a third month in May and South Korean manufacturers' confidence reached a nine-month high in July, recent reports show.

"Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia," Stevens said yesterday.

China is Australia's largest trade partner.

Australia's economy grew 0.4 per cent in the first quarter from the previous three months, and retail sales increased 1 per cent in May, twice as much as economists estimated, buoyed by spending at department stores and restaurants. The services industry expanded for the first time in 15 months in June.

Households with an average A$250,000 home loan are paying A$7000 a year less than they were at the start of September, which is equal to about 8 per cent of family incomes, according to Reserve Bank calculations.

- BLOOMBERG