RBA Says Australian Rate Cuts Helping Stoke Demand

July 21 (Bloomberg) -- Australia’s benchmark interest rate at a half-century low of 3 percent is helping drive economic growth amid signs domestic demand is more resilient than expected, the central bank said.

“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation,” while still giving the bank scope to cut borrowing costs “at a later stage” if needed, policy makers said in minutes of their July 7 meeting released in Sydney today.

The full impact of Reserve Bank of Australia Governor Glenn Stevens’ decision to slash the overnight cash rate target by a record 4.25 percentage points between September and April will “still be coming through for some time,” the minutes said. Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, with fewer people losing their jobs, research company Access Economics said earlier today.

“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” today’s minutes said.

Policy makers left the benchmark rate unchanged two weeks ago for a third month after a report showed gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after shrinking 0.6 percent in the fourth quarter. Economists had forecast a 0.2 percent contraction.

Currency, Bonds

The Australian dollar traded at 81.27 U.S. cents at 11:33 a.m. in Sydney from 81.22 cents before the minutes were released. The two-year government bond yield rose 2 basis points, or 0.02 percentage points, to 4.04 percent.

Further signs that the economy isn’t as weak as expected include “surprisingly strong” exports, helped by demand from China, reports that some mining companies and ports are “again operating close to capacity,” rising household spending and higher demand for homes, the minutes said.

There are “further signs of stabilization in the world economy,” the central bank said today. “In Japan, recent data had been more encouraging than they had been for some time.”

The Bank of Japan last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the BOJ said, while adding that the economic outlook is “uncertain.”

China’s economy grew a stronger-than-expected 7.9 percent in the second quarter from a year earlier, a report showed last week. Singapore’s GDP also expanded faster than anticipated.

‘Gradual Recovery’

For Australia, “the outlook thus remained for a gradual recovery to begin later in the year, and downside risks to that had diminished,” the Reserve Bank said.

While the labor market is likely to remain “soft for some time,” there are signs employers are trying to limit job cuts.

“The current inflation outlook afforded scope for some further easing of monetary policy, if that were to be needed to give further support to demand at a later stage,” the bank said.

Consumer prices probably rose 1.5 percent in the second quarter from a year earlier, slowing from an annual 2.5 percent gain in the first quarter, according to the median estimate of 19 economists surveyed by Bloomberg. The consumer price index will be released at 11:30 a.m. in Sydney tomorrow.

The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of Canberra-based Access Economics said in a report today. Three months ago, Access forecast a 0.2 percent decline.

‘Remarkable Resilience’

“Australia made it through the most dangerous phase of the global recession with only collateral damage, aided by China’s early bounce and the remarkable resilience of Australia’s mums,” Richardson said. Consumers are spending 6 percent more than when the crisis hit.

Still, central bank policy makers judged at their meeting this month that the most likely outcome for the global economy over the next year or two will “be subdued growth.”

“Downside risks had diminished,” the minutes said. “Nonetheless, significant vulnerabilities remained, as households and financial institutions in many major countries continued to repair their balance sheets.”

The long-term impact of the “large run-up” in global government debt that is in prospect “was also unclear.”

Investors have increased bets Australia’s benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

Traders forecast the key rate will be 77 basis points higher in a year, the index showed at 8:20 a.m. in Sydney. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.