The Reserve Bank of Australia (RBA) has left interest rates on hold for the third straight month after taking a more optimistic view on the outlook for the global and domestic economies.
But the central bank also left the door open for further rate cuts, particularly if the local labour market continues to deteriorate and economic bright spots begin to fade.
Economists say if unemployment gains in the second half of 2009, as is expected, it will force the RBA to resume cutting the cash rate from its current 49-year low of three per cent.
RBA governor Glenn Stevens on Tuesday said the downside risks for the global economy have diminished as financial markets have improved and growth in China has strengthened.
Yet he also said tight conditions in global credit markets and the effects of economic weakness on asset quality remain challenging, despite tentative evidence the US economy is nearing a turning point.
Mr Stevens added that while the Australian economy has not been as weak as it was expected to be a few months ago, output remains sluggish and demand for labour is weaker.
However, this also suggested inflation was likely to continue to abate, leaving room for more rate cuts.
“The board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed,” he said in a statement accompanying the July board meeting decision.
“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.”
The official cash rate was last cut in April, by 25 basis points.
JP Morgan economist Helen Kevans said the prospect of rising unemployment was a key risk for Australia.
“So far, the pace at which the unemployment rate has been rising has been relatively modest when compared to previous downturns,” she said.
Barring a sudden rise in unemployment, Ms Kevans said the bank’s easing cycle may have ended.
The unemployment rate stands at 5.7 per cent, the latest Australian Bureau of Statistics (ABS) figures show. New figures for June will be released on Thursday, July 9.
CommSec economist Savanth Sebastian said the RBA’s decision to keep rates on hold was a vote of confidence in the domestic economy.
“We saw them keep rates on hold over the past few months as a sign of confidence in the Australian economy and I think they are trying to maintain that confidence,” he said.
But Mr Sebastian said the prospect of rising unemployment could force the RBA’s hand.
“A rate cut needs to be pencilled in, given that recently we’ve seen job advertising remain very weak,” he said.
“You haven’t seen a significant amount of job shedding over the last few months, but we still do believe the unemployment will continue to rise.”
However, St George Bank chief economist Besa Deda said while the RBA had retained an easing bias, she believed the cash rate had reached its low point in the current cycle.
“The easing bias has remained and markets were waiting to see if that was watered down or removed completely,” she said.
“Given the global economy was still in a fragile state, that is why they have kept it in.
“However, we think they will not have to act again on that easing bias and that three per cent is the low point.”
Mr Stevens said federal government fiscal stimulus measures were supporting demand while earlier rate cuts had been significant.
“The effects of these changes will be coming through for some time yet,” he said.
Between September 2008 and April, the RBA cut the cash rate by 425 basis points.