Stevens Says Australia Economy Aided By Rate Cuts, China Growth

May 19 (Bloomberg) -- Australia’s economy is in good shape to benefit from a global recovery later this year as interest- rate cuts drive domestic demand and a pickup in China stokes exports, central bank Governor Glenn Stevens said today.

Australia “should be in a relatively good position and well placed to take part in a renewed international expansion,” Stevens said in Sydney. “That said, most observers think that the early part of any new global expansion will be characterized by pretty slow growth.”

The Reserve Bank decided against cutting its interest rate this month on signs record policy easing and government stimulus are stoking demand, the board said in minutes of the May 5 meeting released today. Australia is benefiting from a sound banking system and households are responding to the lowest borrowing costs in half a century, Stevens said, after recent reports showed retail sales and mortgage lending surged in March.

“The Reserve Bank is happy with policy at the moment,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “They’re saying we’ll eventually drag ourselves out of the current downturn, but it’s going to be a drawn-out affair.”

The Australian dollar traded at 76.59 U.S. cents at 1:07 p.m. in Sydney from 76.47 cents before the speech was released. The yield on the two-year government bond rose 9 basis points to 3.52 percent from yesterday.

Economic Stimulus

Australia’s economy is likely to “record better outcomes than most other advanced economies in 2009 and 2010,” the central bank’s minutes said.

The government last week announced a A$22 billion ($16.9 billion) program of spending on roads, rail, ports, hospitals and education, adding to cash handouts already allocated earlier this year.

The central bank cut its benchmark rate by a record 4.25 percentage points between early September and April to 3 percent.

“Certainly for the household sector, this is an expansionary monetary policy,” Stevens said, when answering questions after his speech. “The way households are responding confirms that.”

He added that there are signs of “quite a significant” pickup in the economy of China, Australia’s largest trading partner. The central bank’s May 5 minutes noted that export volumes from Australia had held up better than expected in the first quarter.

Australia recorded its second-largest trade surplus on record in March as agricultural exports gained.

Job Gains

Employers unexpectedly added 27,300 workers in April, pushing the jobless rate down to 5.4 percent from 5.7 percent, the first drop in eight months, the statistics bureau said this month. Retail sales rose 2.2 percent in March, four times as much as economists forecast.

“Central bankers can finally see some light at the end of the tunnel,” said Michael Blythe, chief economist at Commonwealth Bank of Australia in Sydney. “While they are understandably cautious, the hint of optimism is there.”

Federal Reserve Bank of Minneapolis President Gary Stern said the U.S. economy is approaching the trough of the worst recession in at least half a century. “There have been a number of more favorable developments in recent months,” Stern said in an interview last week.

The question faced by the Reserve Bank board two weeks ago was “was whether monetary policy should be eased further at this stage, or whether the cash rate should be maintained at its current level,” according to the May 5 minutes.

Rate Expectations

Investors expect Australia’s benchmark interest rate will be lower in 12 months time, according to a Credit Suisse Group index based on swaps trading.

Traders forecast the overnight cash rate target will be 8 basis points lower in 12 months, the index showed at 1:04 p.m. in Sydney. Late yesterday, they forecast 16 basis points of reductions and at the start of April, they tipped 37 basis points of adjustment.

While it’s “too soon to say” whether the global economy is rebounding, “developments over recent months are certainly consistent with the view that a recovery will get underway towards the end of the year,” Stevens said.

The nation’s economy will shrink 1.25 percent in the 12 months through June, before expanding 0.25 percent the following fiscal year, the central bank forecast last week. Three months earlier, the bank predicted growth of 0.25 percent this fiscal year and 1.25 percent a year later.