Australia May Keep Key Rate Unchanged at 3% as Recession Eases

June 2 (Bloomberg) -- Australia may leave interest rates unchanged today for a second month to gauge whether the lowest borrowing costs in 49 years will revive an economy that is probably in its first recession in two decades.

Central bank Governor Glenn Stevens will keep the overnight cash rate target at 3 percent at 2:30 p.m. in Sydney after cutting it in April for the sixth time since early September, according to all 19 analysts surveyed by Bloomberg News.

Australia is in a good position to benefit from a global recovery as rate cuts fuel 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 last quarter, which is less than the Japan economy’s 4 percent slump, a 1.9 percent drop in the U.K.’s gross domestic product and a 2.5 percent contraction in the 16-member euro region’s GDP.

“The Reserve Bank has become noticeably more comfortable with the outlook for the domestic economy in recent months,” said Riki Polygenis, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Nevertheless, the bank retains an easing bias and is watching economic and financial data for anything which may impinge on a recovery.”

GDP decreased 0.2 percent from the fourth quarter, confirming the economy is in a recession for the first time since 1991 following the previous quarter’s 0.5 percent contraction, according to the median forecast of 18 economists surveyed by Bloomberg. The figures will be published tomorrow.

‘Expansionary Policy’

Stevens and his board cut the benchmark interest rate by a record 4.25 percentage points between early September and April.

Households, whose average mortgage is about A$250,000 ($201,500), are paying A$7,000 a year less than they were at the start of September, which is equal to about 8 percent of family incomes, according to Reserve Bank calculations.

“Certainly for the household sector, this is an expansionary monetary policy,” Stevens said on May 19. “The way households are responding confirms that.”

Australian 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.

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 2 percent in April, the third straight gain, according to the median estimate of 17 economists surveyed by Bloomberg ahead of today’s report on housing permits.

Business Recession

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.

“Even if first-quarter GDP is a positive number, economic conditions are recessionary, with firms slashing investment spending and unemployment set to soar,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.

A separate report to be published on June 4 will show the trade surplus narrowed in April to A$1.7 billion from A$2.5 billion, according to the median estimate of 17 economists.

“There is no doubt that further interest rate cuts are necessary,” said Annette Beacher, a senior economist at TD Securities Ltd. in Singapore.

“The cost of the Reserve Bank holding rates so high is the surge in the Australia dollar, which is now at levels that will inevitably strangle exporters and deepen the recession.”

The Australian dollar has climbed a record 25 percent in the three months ended May 31, which reduces exporters’ incomes when their offshore earnings are brought home. Overseas shipments are equivalent to about 20 percent of the nation’s GDP.

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 on June 4, and the Bank of England will keep its rate at 0.5 percent, economists predict.

“We don’t expect the next move in Australia until the August board meeting, when a cut of half a percentage point is entirely possible,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. “The bank would see very limited risks in over stimulating and, moreover, would be mindful of downside risks given the tentative pace of recovery.”

Investors expect Australia’s overnight cash rate target will be little changed in 12 months time, according to a Credit Suisse Group AG index based on swaps trading.

Traders forecast the overnight cash rate target will be 4 basis points higher in 12 months, the index showed at 4:56 p.m. yesterday 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.