'Optimistic' Australia holds fire on cash rate

Australia's central bank left its benchmark interest rate unchanged yesterday for the first time in seven months amid signs the lowest borrowing costs in four decades may keep the economy out of recession.

Governor Glenn Stevens kept the overnight cash rate target at 3.25 per cent in Sydney.

Most economists had been picking a cut of either 0.5 or 0.25 per cent.

New Zealand's Reserve Bank Governor Alan Bollard is widely expected to cut the official cash rate here by 0.75 per cent on March 12. It is currently at 3.5 per cent after a rapid decline from last June's peak of 8.25 per cent.

Stevens lowered Australia's benchmark rate by 4 percentage points between September and February to try to stimulate economic growth.

The governor said the bank's rate cuts and government spending would provide "significant support" to the economy.

Stevens was reluctant to lower rates further "because of his semi-optimistic view of the Australian economy", said Joshua Williamson, a senior strategist at TD Securities in Sydney.

Stevens last month said Australia's economy would outperform its global peers because the nation's financial system was in better shape and monetary policy was working as lenders passed on official rate cuts to households with mortgages.

The US Federal Reserve's benchmark rate is close to zero, the Bank of England's is the lowest since its creation in 1694 and the European Central Bank will probably trim its main rate to 1.5 per cent on Thursday, the lowest level in 10 years of setting policy.

"We cannot realistically expect anything other than weak conditions in the early part of 2009," Stevens said last month.

"The effects of the policy adjustments are only just beginning."

Australia's economy probably expanded 0.9 per cent in the fourth quarter from a year earlier, according to the median forecast in a survey of 21 economists. The gross domestic product report will be published today.

The economy may have escaped a contraction in the quarter because of a 3.8 per cent surge in retail sales in December, the biggest increase in more than eight years, after the government handed out A$8.9 billion ($11.45 billion) to the elderly and families.

Prime Minister Kevin Rudd last month said he would spend another A$42 billion on cash handouts and on infrastructure to drive economic growth.

The number of people employed in Australia gained 1200 in January from December, a report showed on February 12. The median forecast of 17 economists was for a drop of 18,000 jobs.

Still, there are signs Australia may still succumb to its first recession in two decades this year.

Company profits fell in the fourth quarter for the first time in more than a year as earnings at manufacturers, builders and wholesalers dropped, and inventories slid 1.9 per cent.

Waning global demand and a slide in consumer confidence have eroded earnings at companies from lenders such as ANZ to manufacturer Pacific Brands and retailer Harvey Norman.

- BLOOMBERG