Australia's Central Bank Takes A Breather: Economy Responding To Monetary And Fiscal Stimulus

The Australian Central Bank kept its benchmark interest rate at 3.25% today after reductions of 400 basis points over the last seven months, as shown in the first chart.   Governor Glenn Stevens, in announcing the decision, remarked that "In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere.

Through the third quarter of this year Australia has managed to register positive advances in GDP while the U. S. and the Euro Area began to show declines in the second and third quarters, as can be seen in the second chart.  Australia's fourth quarter will be announced tomorrow and is expected to show a much smaller, if any, decline than that shown by the U. S. and the Euro Area. The Reserve Bank of Australia which forecasts year to year changes in GDP and inflation has yet for forecast a decline in GDP.  Their last three forecasts for GDP are shown in the third chart.  Their latest forecast shows the lowest growth at 0.25% in the second quarter of 2009.

Australia has, as noted above, moved aggressively to lower interest rates and market and mortgage rates have responded and are at historical lows. Business loan rates have also declined. Moreover, the government has injected A$8.9 billion in to the economy with cash handouts to the elderly and low income families that no doubt accounted for much of the unusually big increase of 3.8% in retail sales in December.  Last month, Prime Minister, Kevin Rudd, indicated that he will spend another A$42 billion on cash handouts and infrastructure.