The Reserve Bank of Australia (RBA) has left interest rates unchanged for the second straight month as it watches how the recovery in the economy unfolds before determining if more stimulus is needed.
But economists believe more cuts to official interest rates will occur if there is a relapse in the economy.
The central bank left the cash rate at 49-year low of three per cent, as most economists had expected, after its monthly board meeting on Tuesday.
RBA governor Glenn Stevens said the bank was assessing the impact on the economy of market and mortgages rates at historical lows and below average loan rates for businesses.
“Much of the effect of this is yet to be observed,” Mr Stevens said in a statement.
“Fiscal measures are also providing considerable support for demand.”
National Australia Bank senior markets economist David de Garis said the RBA was cautious about the global economy and still held a bias to lower the cash rate.
“It (the statement) does not indicate any change in policy anytime soon, but if there was any change in the next six to nine months you have to favour some incremental easing from here,” Mr de Garis said.
Between September and April, the RBA lowered the cash rate by 425 basis points from a 12-year high 7.25 per cent to three per cent, in a bid to cushion the economy from a global downturn.
RBC Capital Markets senior economist Su-Lin Ong said the RBA issued a veiled warning against being too optimistic about the budding green shoots in the world economy.
“Indeed, the RBA suggested that `Recovery in the major countries is likely to take longer to begin and be slower when it does occur,'” Ms Ong said.
Mr Stevens said the contraction in the Australian economy would lower pressure on wages growth and inflation, which would give room for more rate cuts.
“Nonetheless, the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed,” he said.
“In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.
ANZ Banking Group chief economist Saul Eslake said the prospect of a rising unemployment rate would prompt the RBA into further action.
The federal government has forecast the jobless rate to rise from a current 5.4 per cent to peak at 8.5 per cent in early 2011.
“Bearing in mind that everybody thinks that there is a substantial increase in unemployment ahead of us, relative to what has happened thus far, you have to conclude that there is a reasonable chance that at some point they will act on that bias, if only modestly,” Mr Eslake said.
“The RBA usually cuts rates while unemployment is rising and doesn’t start lifting them until unemployment is clearly falling.”
The central bank would wait-and-see to how the economy reacted to the stimuli from low interest rates and extra spending from the federal government before moving on monetary policy again, Mr de Garis said.
“If the economy relapses in the second half of the year, then it is quite conceivable they will do some more easing,” he said.
Mr de Garis forecasts the cash rate to bottom at 2.5 per cent by the end of 2009.